Afternoon analysis 31.03.2017

The American PCE for February was above the Federal Reserve’s inflation goal. Baseline inflation reading is at its highest level since October. Polish consumer inflation for March was worse than expected.

Positive signal for dollar

According to the Bureau of Economic Analysis (BEA), the American PCE for February was at the level of 2.1% YOY, which is by 0.1 percentage points above the Federal Reserve’s inflation goal. However, baseline PCE has reached the level of 1.8% YOY (estimates: 1.7%). Moreover, the reading for January has been revised from 1.7% to 1.8%.

The food prices have been decreasing for another consecutive month (by 1.5%), whereas the energy prices have increased (18.4% YOY). The opposite trend regarding the food prices has been observed in Europe.

The dollar’s reaction to the data was positive, but relatively limited at the beginning. Taking into consideration that the PCE data is more significant for the Federal Reserve, today’s reading may increase the chances for two more rate hikes this year and support the dollar.

The EUR/USD remains below 1.07 and the reading from the BEA allowed the pair to reach today’s minimum (1.0670). Moreover, the USD/JPY is slightly below 112. At 16.00, we will know the University of Michigan consumer trust index (second reading). If this data is above the consensus (97.6 points), this may support the dollar’s further appreciation.

Negative inflation

According to the Polish Central Statistical Office (GUS), the initial data regarding CPI for March is at the level of 2% MoM, which is by 0.3 percentage points below the market consensus. Moreover, this index decreased by 0.1% compared to February. Poland’s reading is consistent with the global trend of inflation slowdown.

This data has caused a negative reaction on the zloty. Shortly after this reading, the EUR/PLN increased 70 pips and after thirty minutes the pair went above 4.23. The zloty’s reaction against the franc, pound and the dollar was also negative. The USD/PLN went above 3.95 for the first time in one week. The BEA data caused the pair to go even higher (3.96). The zloty lost against the forint as well and went from 73 to 72.8.

Next week’s events

On Monday, IHS Markit will publish the industrial PMI for the eurozone and the selected eurozone’s economies (including Germany), for March. This will be this index’s second reading. The initial reading was near this index’s six-year record. If the second reading is at the same level (or higher), this may support the euro. Moreover, Markit will also publish the British industrial PMI. The market consensus is at the level of 54.6 points. This reading may increase the pound’s volatility, which has been caused by the Brexit initiation.

On Monday at 15.45, Markit will publish the American industrial PMI. However, the market will focus more on the industrial ISM, which will be published 45 minutes later. This index has been increasing over the past six months, to reach its two-year maximum in February (57.7 points). The market consensus for March is at the level of 57.0 points. The industrial ISM may have a significant impact on the dollar.

On Wednesday, we will receive the minutes from the previous meetings of both the European Central Bank and the Federal Reserve. The most recent statements from the FOMC members indicate that they expect three rate hikes for 2017. This will most likely be confirmed by the minutes. However, the ECB minutes may be even more interesting, taking into consideration the hawkish interpretation of the previous ECB announcement, as well as the most recent dovish signals from the Bank. Therefore, we may expect a strong reaction on the euro.

On Friday, we will know the data regarding the American labor market (employment in non-agricultural sector, the unemployment rate and the average hourly wage). The market will most likely focus on the average hourly wage, which has been below the consensus for the past four months. If this index is low, this may translate to lower inflation pressure and wear-off the dollar. The market consensus for this index is at the level of positive 0.2% MoM.