Afternoon analysis 30.06.2017

May’s inflation data in the US didn’t cause any substantial changes in the valuation of the dollar or the euro. The zloty was in a better condition despite worse than expected inflation reading.

USD still under pressure

The Bureau of Economic Analysis (BEA) published at 2.30 p.m. long awaited PCE inflation report. The prices grew in May by 1.4% year-over-year (the core PCE index as well). It’s worth noting, however, that it was the third month in a row of gradually falling inflation – it was as high as 2.1% only in February (1.8% core). The actual value didn’t deviate from the market consensus, hence the market reaction was rather limited.

The EUR/USD pair traded just above the 1.14 level and the dollar’s index (DXY) oscillated around 95.5 points. Today’s BEA publication increased the probability of the US currency remaining under pressure, at least until the end of the next week when the labour market report will be made public. Hence, one shouldn’t expect any significant price movements in the currency market. However, EUR/USD could fall below 1.14 during the afternoon’s session taking into account how the euro has rapidly gained value.

Poland saw the lowest inflation since December

The Central Statistical Office (GUS) published today a short report regarding consumer inflation (CPI) in the Polish economy in June. According to a preliminary estimate, the prices grew by 1.5% compared to June 2016, although they decrease 0.2% in relation to May. CPI index at 1.5% YOY was the lowest reading since December and also 0.2 percentage points below market expectations.

The zloty’s reaction to the aforementioned data was limited. The Polish currency remained today in a better condition as a result of better sentiment on the European stock markets and a weakened dollar. The low price growth was most probably due to a sharp decrease in oil prices, which will only have a temporary impact.

The PCE inflation in the US was a potentially more important publication for the zloty. Although the data didn’t surprise either on the upside or the downside, it increased the chances of the zloty maintaining its recent gains due to the weakness in the dollar – USD/PLN was close to 3.70, which was the lowest level since October 2015. The better sentiment in the European markets caused the Polish currency to also gain against the euro, the pound, the Swiss franc and even the Hungarian forint, making up for the losses sustained during the past days.

Next week’s preview

The next week could bring substantial movements in the currency market, especially in the case of the dollar and the euro which have been subject to increased volatility in recent days. ISM manufacturing index will be published on Monday for the US economy, and its services equivalent on Thursday. Those publications could increase the trading range of the dollar should they deviate substantially from the market consensus, however, Friday’s June jobs report could have a far greater impact on the US currency.

The data regarding the average hourly earnings and private nonfarm payrolls will be important in particular. The Federal Reserve argues that a tightening labour market could cause the inflation to move higher which could justify gradual interest rate increases in their view. Should the aforementioned data miss expectations (especially earnings data which put pressure on inflation), the dollar could remain weakened. However, if the numbers in the report prove to be solid and/or exceed the market consensus, the US currency could post a strong gain which could negatively impact the zloty.

The Thursday record of the last European Central Bank monetary committee’s meeting could prove also vital for the euro. Its recent rapid appreciation was sparked by Mario Draghi whose comments were perceived as hawkish by the market (in contrast to being dovish in the past). Should the “minutes” contain suggestions relating to the tightening of the monetary policy, the euro could gain strong support to its recent gains. On the other hand, if there are no such remarks, the eurozone’s currency could lose value.