Afternoon analysis 31.05.2017

Mixed data from the eurozone were neutral for the region’s currency. The dollar remained under pressure, however, the labour market data could improve its condition. Inflation in Poland was below expectations but the zloty was still strong.

EUR/USD above 1.12 yet again

The dollar remained weaker for yet another day in a row. In the absence of any significant data today that could potentially strengthen it, the EUR/USD pair was visibly higher today and above the 1.12 level, closing in on the highest level since the US elections. The US currency was also weaker in relation to the yen: USD/JPY remained below 111, close to the lowest level in a month. This caused the dollar’s index (DXY) to fall to 97 pts – the lower boundary of last week’s trading.

The uncertainty regarding the number of rate hikes in the US this year could hurt the dollar. The slowing inflation, as seen by both CPI and PCE indexes, slightly decreased the chance of yet another two interest rate increases in the remainder of this year. The last two days of the week could prove key for the dollar when the labour market data will be published. A positive reading, especially concerning average earnings and employment, could confirm an improving labour market condition and, in effect, strengthen the US currency.

There were also some mixed data from the eurozone during the day, which had a relatively limited impact on the euro. Although the unemployment rate in Germany fell to the lowest level since the German reunification 27 years ago and in the whole eurozone to the lowest level in 8 years (9.3%), the CPI inflation in May fell short of market expectations. The prices rose by 1.4% year-over-year, while a 1.5% increase was expected. This was also the slowest growth rate since December.

Inflation below expectations

The Central Statistical Office (GUS) in Poland published today preliminary data regarding the level of inflation in May which saw an increase of 1.9% year-over-year. This was 0.1 percentage points below the market consensus and also the lowest level since January. The data, however, proved to be neutral for the Polish currency as they were in line with the global trend of lower inflation.

The zloty was in good condition for yet another day. The euro and Swiss franc in relation to the Polish currency were on similar levels, however, the zloty gained to the dollar and the pound. Both currencies remained under pressure today – in the case of the dollar that was probably due to the uncertainty regarding the number of rate hikes. The pound was lower because of the speculation that the ruling party (Conservative Party) could not achieve a majority in the upcoming elections.

Should the US labour market data surprise on the positive side, the dollar could significantly appreciate as the probability of another two rate hikes this year in the US would increase. The pound, however, could remain under pressure until the election results are known.

Tomorrow’s preview

IHS Markit will publish at 9 a.m. Poland’s manufacturing PMI in May. Its level has been oscillating around 54 pts since December, with little deviation. The market consensus points towards an increase by 0.4 pts to 54.5 pts in May. A reading around 54 pts yet again could have very little effect on the zloty. Only a significant deviation from the aforementioned level could spark a visible reaction.

At 2.15 p.m., ADP will share data regarding the change in nonfarm payrolls in May. In April, they increased by 177k, while in the previous three months they grew by over 200k in each of them. Fifteen minutes later, the Department of Labor will publish a report on initial jobless claims and insured unemployment.

Both of them have positively surprised: initial jobless claims have been under 240k in the last four weeks and close to 44-year lows, while the insured unemployment count has been under 2 million for the sixth week in a row (and close to 29-year lows). A neutral (150k – 200k) or positive (above 200k) ADP reading coupled with yet another solid report from the Department of Labor, could support the dollar which has been greatly weakened in recent weeks.

Important data will hit the market at 4 p.m. when ISM will publish its index regarding the manufacturing activity in the US economy in May. The ISM manufacturing index unexpectedly decreased in April to 54.8 pts from 57.2 pts a month earlier. The current market consensus points towards a continuation of the declining trend and a further drop to 54.5 pts. Should it happen, the earlier potentially positive data from the labour market could have ultimately very little impact on the dollar. On the other hand, if the ISM index exceeded market expectations and got close to the March level, the US currency’s value could increase.