Afternoon analysis 30.05.2017

No larger changes in the US inflation data. The German inflation reading was the lowest since November, which indicates a potentially low consumer inflation reading from the eurozone. The zloty remains in a positive condition.

Increase in volatility

Today, we have been observing an increased level of volatility. At 8.00, the EUR/USD went down to 1.11, which was caused by a weakening euro and a strengthening dollar. However, due to the dollar’s wear-off in the following hours, the main currency pair has returned to near 1.115.

At 13.40, Reuters informed that the ECB policymakers set to upgrade economic risk assessment in June. Moreover, the ECB is likely to discuss removing easing bias. This caused the EUR/USD to bounce rapidly to 1.12, but its exchange rate decreased to 1.117 before 14.30.

The German inflation for May was at the level of 1.5% YOY, which was consistent with the market consensus (1.6%), but also lower by 0.5% percentage points compared to April. This was its lowest result since November, which was mainly caused by a low increase in the prices of energy. The latter increased 2% in May, whereas its growth in the past two months was at the level of 5.1%. This suggests a slowdown in the eurozone’s inflation. However, the euro is more susceptible to the baseline inflation readings.

Today’s data from the US Bureau of Economic Analyses (BEA) is essential in regard of future inflation expectations, as well as interest rates. The PCE for April was at the level of 1.5% YOY, which was consistent with the consensus. The consumer expenses and income index was also consistent with the consensus (positive 0.4% MoM).

The BEA report’s impact on the dollar was limited. The EUR/USD was near the 1.116 level, shortly after the data had been published. Investors continue anticipating the Conference Board consumer trust index (at 16.00) and Lael Brainard’s testimony. However, their impact on the dollar will most likely be limited. At the end of the week (Thursday and Friday), we will receive the data from the US labour market, which may set the sentiment towards the dollar for the forthcoming weeks.

Zloty remains strong

Due to the fact that the US data was consistent with the consensus, instead of exceeding expectations, the zloty’s condition remains positive. This situation most likely won’t change until the publication of the data from the US labour market. Due to the dollar’s strengthening this morning, the USD/PLN increased to 3.77. However, the following hours have brought its decrease to the level of 3.73. The EUR/PLN has been stable within the range of 4.17-4.18.

Another potential danger for the zloty is a deterioration in the current sentiment in Europe. Even though this seems fairly limited, the matter of Greece, as well as the forthcoming elections in the UK and Germany could increase risk aversion. This would cause the capital outflow to more secure assets, which would be negative for the emerging market currencies, including the zloty.

Tomorrow’s events

Tomorrow, we will receive data which may significantly affect the euro. At 8.00, Destatis will publish data regarding German retail sales for April. After a 2.3% YOY decrease in February, this index increased by 2.3% YOY in March. A similar result is estimated for April. At 9.55, Destatis will present the employment data for May (estimates: negative 15k). At 10.00, we will receive the unemployment rate for May, which is estimated to be at the level of 5.8%.

At 11.00, Eurostat will publish the initial data regarding the eurozone’s CPI for May. In April, the CPI increased 1.9% YOY, but the most positive surprise was the 0.7% growth of the baseline CPI (up to 1.2% YOY). Currently, the market consensus is at the level of 1% YOY. Investors will most likely focus on the baseline CPI, because its high level may convince the ECB to abandon its extremely mild monetary policy sooner. Positive data from the German labour market and the baseline CPI above 1% may support the euro.

At 14.00, the Polish Central Statistical Office (GUS) will present the initial CPI for May. The market consensus is at the level of 2% YOY, which is the same as in the past two months. However, this data is unlikely to significantly affect the zloty. Primarily, this won’t be the baseline index, which is more essential in regard to future interest rates. Secondly, over the past few months the zloty has been strongly affected by the external factors, such as the general sentiment towards the emerging market currencies.