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Afternoon analysis 31.01.2018

31 Jan 2018 16:04|Bartosz Grejner

Data on employment growth in the US positively surprised but had limited impact on the dollar. Market attention is focused on the evening Federal Reserve (Fed) statement. The zloty could be under pressure in case of a hawkish statement from Fed.

Better data from US but dollar stays insensitive

Two days before the official report of the US Department of Labor, ADP (a private institution) published a report on employment change in January. The employment growth in the non-farm sector by 234k turned out to be 4k higher than market expectations. The largest number of new payrolls was created in the services sector, 212k payrolls, while in the goods manufacturing sector only 22k payrolls were created (industrial processing: 12 thousand).

However, this data did not help the dollar, which remained under pressure. Today, the main currency pair quotations, EUR/USD, have increased to the highest level since Friday, to about 1.247. Moreover, the ADP readings are quite often different from official data from the Department of Labor so the market's reaction may be limited.

The market's attention is mainly focused on the evening Fed statement (8.00 p.m.) after the two-day meeting of the Federal Open Market Committee (FOMC). Recent good macroeconomic data, especially on consumption and investment presented in recent GDP data together with inflation, may suggest that today's statement may be relatively hawkish. Around publication time, a significant fluctuation of the dollar may be seen, although it seems that, in the end, the dollar may appreciate compared to the current valuation.

Zloty can't wait for Fed

Today's weaker dollar helped the whole zloty basket. The Polish currency gained about 0.01-0.02 PLN in relation to the main currencies (compared to the previous day). However, the evening Federal Reserve (Fed) statement may also introduce slightly more volatility to the zloty exchange rate. Therefore, the statement from the Fed may be hawkish and the Polish zloty may give back a part of the profits generated during the day.

The potentially positive effect on the dollar and the concurrent negative effect on the zloty may be limited. Although inflation in the US is not falling, its entry into a sustainable growth path is not observed. This limits the chance of a significant increase in the probability of four US rate hikes this year and therefore limits potential dollar appreciation.

Tomorrow's preview

Around 10.00 a.m. PMI data for the industrial sector in France, Germany and the eurozone as a whole will be published. However, this will be the second reading of these indexes, therefore, its deviation from initial data (the week before) is limited, and so is its impact on euro quotations.

In contrast, PMI reading of this sector for the UK (the only publication) may have a slightly greater impact on the pound's quotation, it will be published at 10.30 a.m. The market consensus indicates a slight increase (by 0.2 points) to 56.5 points. However, it is likely that only a reading close to November's data (58.2 points) could cause a more significant reaction from the British currency. On the other hand, a reading below 55.3 points (the lower boundary from the last six months) could slightly weaken it.

In the afternoon, data on the US economic situation will be published. At 2.30 p.m., the Department of Labor will publish a weekly report on initial jobless claims. Two weeks ago, it showed that they had fallen to the lowest level in 44 years (216k). A week later, however, they increased to 233k, while the median of market expectations for this week indicates a further increase to 238k. These results are still close to the last lows, which means that only a number of jobless claims of 250k - 260k or below 220k could trigger a reaction on the US currency.

However, this data is rather secondary in terms of its impact on dollar trading. The market may still be under the influence of today's Federal Reserve statement. At 4.00 p.m. ISM will publish its January's manufacturing index (PMI) for the industrial sector in the US. If its data deviates (around 1 percentage point) significantly from the market consensus (58.8 points), increased volatility on the dollar can be observed. A lot will depend on today's Fed statement. If the dollar enters into the appreciation path, tomorrow's ISM data may have a limited impact on it.

31 Jan 2018 16:04|Bartosz Grejner

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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