Break in the dollar appreciation (Afternoon analysis 28.02.2018)

Low volatility on the market. Inflation in the euro zone and GDP growth in the US are in line with expectations. The dollar appreciation stopped, the zloty is benefiting and slowly making up for losses.

Better sentiments

After yesterday's sale on the stock and bond market caused by the new head of the Federal Reserve testimony before the US Congress, we have observed a gradual improvement in sentiment. Although the changes were not large, the zloty gradually recovered losses in relation to major currencies. This is due to the improving sentiment on the market and the dollar appreciation. As a result, we have observed low volatility on the main currency pair, the EUR/USD, which was traded slightly above the 1.22 level.

It might have also been a result of relatively important macroeconomic data published today, which proved to be in line with market expectations. Consumer inflation in the euro zone in February amounted to 1.2% per annum, and its base indicator (excluding energy, food, alcohol and tobacco prices) was 1.0%. Also, the US GDP growth rate in the fourth quarter did not surprise - the reading at 2.5% was convergent with consensus.

The calendar of scheduled publications for the next hours is practically empty, hence the zloty behavior will depend, to a large extent, on the afternoon quotations on the US stock market. Another sell-off of the major indexes could increase risk aversion, negatively translating into demand for more risky assets, such as currencies of emerging countries, including the zloty. At the moment, the probability of yesterday's scenario repetition seems limited - American indices started the day with increases. If this condition persists, the zloty may gradually recover losses.

Tomorrow on the markets

Probably the most important publication tomorrow may be the Bureau of Economic Analysis report regarding PCE inflation in January. This is the type of inflation that the Federal Reserve takes into account in its projections. Market attention will be focused on core inflation (excluding energy and food prices) to the largest extent. The median of market expectations indicates a reading of 1.5% year-on-year and a deviation from this value by 0.1% may cause significant dollar fluctuations.

In particular, an increase of over 1.5%, taking the "hawkish" interpretation of the Federal Reserve chairman before the Congress into account, may contribute to the further dollar appreciation. The prospect of higher-than-expected inflation and an increase in the likelihood of faster monetary tightening in the US may, in turn, worsen sentiment in the stock and bond market. The sell-off on these markets would have a higher probability of negatively affecting the zloty valuation.

Potentially another impulse for the dollar may be the PMI index of the US industrial sector published by ISM at 16. Although the market consensus assumes a marginal decline in February by 0.1 points to 59.0 points, a reading above 59.7 points, which would mean the highest growth rate in the sector in five months, may slightly improve the dollar valuation.