Afternoon analysis 30.08.2017

The series of positive data from the US may strengthen the dollar - GDP grew at the fastest pace in 10 quarters and employment in the private sector increased most since March. Favourable data from the US and potential strengthening of the dollar may, in turn, put pressure on the Polish currency.

Positive data from the USA

Today, the Federal Statistical Office (Destatis) released August's preliminary data on consumer inflation (CPI). It turned out to be in-line with market expectations at 1.8% level in relation to August last year and 0.1% in July. However, if looking closely at the components, the rise in inflation from 1.7% to 1.8% was due to an increase in commodity prices.

Food price growth was 3% on a yearly basis, against 2.7% a month ago. In turn, for the increase in energy prices to 2.3% (from 0.9% in July) were mainly responsible higher prices of energy resources. In contrast, the rate of growth in service prices decreased from 1.7%, observed in June and July, to 1.6%.

Therefore, the index excluding food and energy prices was unlikely to show growth as did the main reading. It makes the scenario probable that tomorrow's core inflation reading in the eurozone will not be positive, which may, as a result, put some pressure on the euro.

Today, a series of data that was above expectations from the US economy has been published. According to ADP, employment in the private sector increased by 237k - the most since March, when it increased by 255k. Fifteen minutes after this publication, the Bureau of Economic Analysis (BEA) presented the second reading of GDP growth in the second quarter.

The annualised 3% increase proved to be much better than both expectation (2.7%) and preliminary data (2.6%). In comparison to the first reading, consumer spending was also revised upward from 2.8% to 3.3%. In addition, after recent quarterly GDP revisions, the growth of 3% is the highest since the first quarter of 2015.

The series of better than expected data has the chance to strengthen the dollar. Although the dollar did not appreciate after the publication, it may change in the afternoon, when US investors will be more active. The EUR/USD pair was just above the 1.19 boundary and in the following hours, it may drop below.

On the other hand, the possible dollar's appreciation may be limited by the fact, that in the next two days inflation and labour market data in the USA will be published, which may have a significant impact on its valuation as well.

Polish currency may also incur some losses

The zloty was slightly weaker since the beginning of the day. Part of this could have been due to the stronger dollar, and partly as a reaction to yesterday’s afternoon trading, during which, the zloty pared most of its losses. The zloty's fluctuation range, in relation to the main currencies, was, however, relatively limited and within the previous days’ range. While the zloty has lost most in relation to today's stronger dollar or pound, it should be noted, that these are levels near recent lows.

The aforementioned positive data from the US economy may slightly increase the probability of the dollar's strengthening, which could, in turn, result in the zloty's weakening. We need to wait for Thursday's US and eurozone inflation data, as well as for Friday's US labour market report to observe more significant movements in the main currency market. If macroeconomic readings from the US economy were as positive as today, the zloty could be subject to downward pressure.

Tomorrow's preview

Tomorrow, a relatively large amount of macroeconomic data will flow into the market. At 8 a.m., Destatis will release July's retail sales data in the German economy. The market consensus assumes a 3.5% increase in relation to the previous year and a decrease of 0.4% compared to June.

Less than two hours later, German unemployment data will be published - the unemployment rate is likely to remain unchanged, 5.7% level, and according to the median of market expectations, the number of people registered as unemployed could decrease by 6k.

However, the above data will be likely to have a very limited impact on the euro. At 2 p.m., Eurostat will publish August's preliminary consumer inflation (CPI) reading in the eurozone, which probably will draw the investors' attention in the context of the euro’s valuation.

For some time, the improving economic situation in the eurozone and gradually, however slowly, increasing inflation have been strengthening the expectations over the QE tapering by the European Central Bank next year. Market consensus points to an increase in inflation by 1.4% compared to August last year (from 1.3% in July).

However, the core index (excluding the most volatile prices) is expected to remain at the 1.2% level, which it hasn't exceeded for more than 4 years. If it turned out to be above this level, the euro could significantly appreciate.

At 2.30 p.m., July's PCE inflation in the US will be published. This index is used by the Federal Reserve to create inflation projections. Therefore, it is relatively more important than consumer inflation (CPI) for the US. Its core index (excluding energy and food prices) was 1.5% YOY in May and June.

July's reading diverge from 1.4% - 1.5% level could significantly increase the dollar's volatility. A higher level could reinforce the probability of increases in rate highs, which could lead to the dollar's strengthening.