Daily analysis 07.09.2017

07.09.2017 12:52|Marcin Lipka

The final GDP reading from the eurozone was above market expectation. Many elements of the ECB's statement can influence the final EUR/USD reaction after Mario Draghi's press conference. A dovish message sent by the MPC slightly weakened the zloty. Around midday, the EUR/PLN pair was close to the 4.25 boundary.

The most important macro data (CET - Central European Time). Surveys of the macro data are based on information from Bloomberg unless noted otherwise.

  • 1.45 p.m.: Decision on interest rates in the eurozone (estimates: deposit rate -0.4%),
  • 2.30 p.m.: Publication of the ECB statement after the central bank meeting and macroeconomic forecasts. Mario Draghi's press conference.

Positive data before the ECB's decision

Before midday, the Q2 final GDP growth data for the single currency area was published. Eurostat reported that the eurozone's economy grew at a pace of 2.3 percent YOY. It was a result of 0.1 percentage point above earlier estimates, as well as a consensus among economists. In addition, this is the best result since the first quarter of 2011. If the growth pace remains close to the current level as the economy dividing the single currency, it will expand in 2017 the fastest for a decade.

Although the published in the morning data will no longer be included in the latest ECB forecasts, however, to some extent, it may influence the reception of Mario Draghi's press conference. The market may be focused on elements that should support the euro rather on those that are negative for the single currency area.

Crucial element of the statement

First of all, investors will pay attention to three issues included in the ECB's statement. First and foremost, how and in which way the monetary authorities are concerned about the recent increase in the euro's valuation? On the one hand, the "minutes" of the last meeting expressed anxiety about the further growth of the euro. On the other hand, Mario Draghi did not mention a strongly appreciating currency during his speech at Jackson Hole. However, the more comments about the possible negative effects of inflation or GDP growth due to the rising value of the currency, the chance of the EUR/USD reduction is more likely. If Draghi had ignored the fears of a strong euro, then we could pretty quickly see levels exceeding the 1.20 boundary.

Another issue is the one connected with getting out of quantitative easing. Economists in Bloomberg's surveys expected the QE tapering announcement to take place in October. However, the same news agency reported a few days ago, citing its source, that it may take place in December. Reporters at the conference will probably ask Draghi whether there is a discussion among the monetary authorities about the reduction in the bond-buying program. The more information Draghi releases during these conversations, the greater the chance for euro appreciation. If the ECB president suggested that if this discussion continues to be in a very poor stage, then the EUR/USD pair could fall.

The last main element on which the market will pay attention to is the ECB's forecasts for inflation and economic growth in the coming years. Probably the GDP estimates for 2017 will be raised, as in June, it was expected to be 1.9%. Taking into account the first quarter and still unknown to this day results for the second one (2.2% YOY), projections should be raised at least up to 2.0 percent for the whole the year 2017. Moreover, the perspectives for GDP growth may also be revised upwardly for the next few years.

However, the biggest uncertainty is inflation, especially in 2018. The ECB revised it from 1.6 percent in June up to 1.3%, which seems to be a significant reduction. Faster GDP growth and slightly accelerating inflation in the last month could raise the perspectives for next year. On the other hand, since June's projections, we have seen a slight appreciation in the euro, which may cause downward pressure on inflation in 2018. As a result, the inflation forecast may remain low, close to June's estimates.

Before the release of GDP data, it could be expected that during Draghi's press conference he would try to submit arguments that would be negative for the euro (at least in the short term). The better than expected readings from the single currency area, however, may be more difficult to achieve, or the market may not believe in the dovish statement from the ECB. As a result, there is a greater chance of a continuation of the EUR/USD growth than its decline.

Zloty under slight pressure

Yesterday's press conference following the MPC meeting did not bring any hawkish statements. There were a lot of dovish suggestions, and in particular, about maintaining the unchanged interest rates until the end of 2018 by President Glapiński. As a result, the EUR/PLN pair crossed the 4.25 boundary on Wednesday afternoon.

Today, a weaker condition of the zloty has been visible on the market, especially in relation to the forint. The PLN/HUF fell near to the 72.00 boundary around midday. In the afternoon, the market's attention will be paid to the ECB meeting. The reaction to hawkish or dovish statement has not been clear, however. In order for the EUR/PLN to fall after less dovish news from the ECB, the conditions like low US yields and relatively good sentiment in the US should be met. As a result, most movement can be observed primarily on the USD/PLN pair. With a noticeable crossing of 1.20 boundary to EUR/USD, the dollar may now reach its lowest level since the beginning of 2015 (3.52 PLN).

 


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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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