Afternoon analysis 31.07.2017

31.07.2017 15:03|Bartosz Grejner

The European Central Bank with another argument for tightening monetary policy, although the EUR/USD pair has remained stable. July's inflation in Poland has risen in line with expectations - but the zloty has been still under pressure.

The EUR/USD pair stabilisation over 1,17

Monday's trading in the currency market has gone relatively quietly (until 3 p.m., CET). Today, the most important data was the CPI inflation in the eurozone. Although the main indicator has remained unchanged at 1.3% on a yearly basis, the much more important core (excluding most volatile prices) has risen above expectations to 1.2%.

Taking into account that this has been the level of 4-year inflation highs, the European Central Bank (ECB) has been given an additional argument for tightening its monetary policy. According to the ECB members comments, this would be achieved by winding down the monthly asset purchase program in the first place, and only afterwards - by interest rate hikes.

The euro's reaction was limited and has been even losing some value today. The exchange rate against the dollar (EUR/USD) has fallen from 1.176 to 1.172. Probably, investors may react, on the one hand, to the recent significant devaluation of the dollar combined with the euro's appreciation. Moreover, this week there will be a lot of information that could significantly affect the dollar's valuation. Most important are: PCE inflation tomorrow (more below) and Friday's labour market report from the US.

Inflation in line with expectations

According to the Polish Central Statistical Office (GUS) preliminary data, July's consumer inflation (CPI) in Poland has risen to 1.7% - in line with market expectations - compared to 1.5% a month earlier (in annual terms). It was still 0.5 percentage points lower than this year’s peak from February . The GUS publication, however, had very limited impact on the zloty.

Although the Polish currency was relatively strong in relation to the dollar or the Swiss franc, it was mainly due to the poor global condition of both currencies. Today, we did not observe any increased volatility of the zloty (until 3 p.m.), but it still remained under pressure. It was noticeable in relation to the Hungarian forint, where the zloty has been close to the lowest value for five months. Also, the valuation of the euro against the Polish currency has remained relatively high - the EUR/PLN pair was only 2 gr from the recent three month highs.

Now, it seems that there have been more arguments that could support the weakening of the zloty. Political factors may play a relatively large role in the valuation of the zloty - limiting its potential appreciation and increasing the likelihood of its depreciation. he dollar’s movements may also have a relatively large impact on the zloty which could be sparked by tomorrow's inflation release and Friday's US labour market report.

Tomorrow's preview

At 9.00, IHS Markit will publish July's PMI of the Polish industrial sector. Last month activity in this sector has increased to 53.1 points (from 52.7 points). Although it was 0.6 points lower than expected, a description of the Polish industry situation was positive. Currently, market expectations indicate an increase in July to 53.3 pts. Although the zloty may react to this publication (especially in the case of a deviation from consensus), the data may prove to be relatively neutral for this publication. The value of the Polish currency has currently been more dependent on internal political factors and the behaviour of the dollar and foreign treasury bonds.

One and a half hours later, Eurostat will present preliminary data on the eurozone economic growth in the second quarter. The growth rate of GDP is expected to increase by 2.1% compared to last year, against 1.9% in the previous quarter. After better than expected data on core inflation and unemployment rates in the eurozone, the euro may get an additional support if it reaches the expected (or higher) level.

At 2.30, the relevant data from the dollar point of view will be released. The Bureau of Economic Analysis (BEA) will publish PCE inflation data. It is the type of inflation that the Federal Reserve (Fed) takes into account in its projections. Hence, this publication, especially in the case of deviations from consensus, may cause significant fluctuations in the US currency value.

Especially after the last FOMC meeting, when the monetary committee members declared they would be watching closely the inflation readings. The median of market expectations currently indicates 1.3% YOY for the headline and 1.4% for core inflation.

 


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