Afternoon analysis 31.08.2017

July's PCE inflation in the US in line with expectations - the dollar has slightly gained, but now investors are waiting for the US labour market report. Price growth in Poland in line with expectations - the zloty was relatively stable, although the USD/PLN pair exceeded 3.60 for the first time since Friday.

Data from the US in line with expectations

Today, the Bureau of Economic Analysis (BEA) presented one of the most awaited data from the US economy this week - PCE price index. In July, it amounted to 1.4% on a yearly basis which was both in line with expectations and last month's reading. On the other hand, its core index (excluding energy and food prices) fell from 1.5% to 1.4% - also in line with consensus.

Private spending was slightly above expectations (by 0.3% MOM) and similarly as the private consumption growth (by 0.2% MOM). Both were expected to rise 0.1 percentage point more. On the other hand, however, June's data was revised upward by 0.1 of a percentage point.

It can be said, that the BEA report on July's PCE inflation turned out to be rather neutral. In turn, data on last week's initial jobless claims turned out to be slightly above expectations: the number of claims submitted was 236k (against a consensus of 1k more), and the number of insured unemployment fell to 1.942 million, although the expected reading was 8k higher.

The dollar remained stronger than yesterday, but the reaction to the data was very limited. Taking into account, that the most important data (on core inflation in both, the USA and the eurozone) was in line with expectations today, fluctuations in the main currency pair probably will not be significant later in the day. Today, the EUR/USD rate fell gradually to 1.182. The market’s attention is probably focused on tomorrow's labour market report. If it does not disappoint or slightly exceeds expectations, the EUR/USD may fall significantly below 1.18 boundary.

August's inflation in line with expectations

According to preliminary data from the Polish Central Statistical Office, August's consumer inflation (CPI) was 1.8% in annual terms. However, if we look at monthly changes, August was the third month in a row, in which a fall of 0.2% was recorded. However, this data was in line with expectations, therefore, the Polish currency did not react to the GUS publication. The inflation rate (excluding energy and food prices), which will be presented by the National Bank of Poland next week, is a much more significant index of inflation trends.

The aforementioned US inflation data had the highest chance to influence the zloty's valuation. However, this data was in line with expectations and its impact on the Polish currency was small. Even before the publication, the USD/PLN pair rose slightly above 3.60 - the highest level since Friday, although after the US publication of PCE inflation the rate fell towards 3.59. In turn, the zloty's valuation in relation to the pound, the franc and the euro remained stable and close to yesterday's levels. The calendar of scheduled publication is very limited later on today, so the risk of fluctuations in the zloty's value should also be limited.

Tomorrow's preview

Around 10 a.m., IHS Markit will publish manufacturing PMI indexes for, among others, France, Germany and the eurozone. Taking into account that these will be the second readings of these indexes, the probability of significant changes, and thus impact on the euro quotes, is limited. However, at 10.30 a.m., the index data for the British economy will be released (the only reading).

In the previous month, the sector's activity increased above expectations to 55.1 pts (from 54.2 pts), and now, the market consensus assumes to maintain this level (55.0 pts). However, the pound's reaction may be limited. So far, this year's PMI industry has fluctuated in a relatively narrow range of 54.2-57.3 pts, without a marked upward or downward trend. Therefore, the probability of a big surprise is relatively small.

Friday will contain the most important data which will be published by the US Bureau of Labor Statistics (BLS) at 2.30 p.m. August's US labour market report may determine the direction in which the dollar will move in the coming weeks.

Wednesday's ADP report, which showed an increase in employment by 237k (55k above expectations), may suggest that BLS data may also surprise positively (estimated at 180k). However, the most important data in the report will probably be the average earnings data. Their higher growth rate could suggest greater inflationary pressure and therefore, higher probability of rate hikes (and consequently the dollar's strengthening).

Currently, the median of market expectations indicate an increase of 2.6% compared to August last year (and 2.5% a month ago) and 0.2% compared to July. If the aforementioned data does not disappoint or proves to be even better than expected, we may face further dollar appreciation given the significantly better than expected US GDP growth in Q2.