Daily analysis 12.07.2017

Before Janet Yellen's speech, the dollar makes up a part of yesterday's run. Almost perfect data from the British labour market supports a few quotes on the pound. The zloty remains stable against the euro. Greater volatility on the pairs associated with the US and UK currencies.

Macro key data (CET time - Central-European). Estimates of macro data are based on information from Bloomberg unless marked otherwise.

• 2.00 p.m.: Core inflation of Poland (estimate: 0.8 % YOY)
• 2.30 p.m.: Fed releases Chair Yellen's testimony to Congress
• 4.00 p.m.: Federal Reserve Chair Janet Yellen appears before the U.S House Financial Services Committee

Variable afternoon

Early yesterday evening, investors waited for Lael Brainard, a member of the Board of Governors of the Federal Reserve. However, before the text was published, two negative pieces of information for the dollar were released. The first was about the 2016 presidential election. New information describing the course of the campaign may delay the introduction of announced tax changes. This, in turn, would be an argument for the Federal Reserve to cautiously approach the monetary tightening in the US. Developments like these are not conducive to the dollar either.

The publication of an interview with Patrick Harker by the Wall Street Journal was another issue. President of the regional Fed branch in Philadelphia, (a voting member of the interest-rate-setting Federal Open Market Committee), said if inflation isn’t moving toward the central bank’s 2% target, “it would give me a little pause in terms of the policy path.”

Although Harker's statements in the WSJ were conditional, the market is aware that inflation has started to fall in recent months, and this isn’t only due to a commodity price reduction. In addition, wages are growing at a slower than expected pace, and to some extent, this can begin the monetary tightening. As a result, the market was negatively impacting the dollar even before Brainard.

Brainard's speech, however, focused mainly on the attempt to model the impact of monetary easing on the economy. However, the last three paragraphs explicitly referred to the current situation. Brainard said she wants to, "assess the inflation process closely before making a determination regarding further adjustments to the federal funds rate in light of the recent softness in core PCE (personal consumption expenditures) inflation." This may be the signal that the Fed will begin its balance reduction and want to wait for a clear return of the target inflation before deciding on another rate hike. In part, this is also linked to Harker's suggestions in an interview with WSJ.

As a result, at the end of the session in the US, the EUR/USD began to approach 1.1500. Before midday, we had an adjustment of yesterday's movements and a fall to 1.1450. Part of the market is likely concerned that today's speech from Yellen may be relatively hawkish (like the FOMC conference in June). However, should any suggestions appear during the Q&A section that could point towards a possibility of halting interest rate hikes (due to low inflation or the need to study the balance sheet’s reduction impact on the US economy), the dollar could remain under pressure.

Good data helps the pound

Looking at data from the British labour market, it seems to look almost perfect. Unemployment dropped to 4.5% (least since 1975). The percentage of employees (16-64 years) is the highest since 1971 at 74.9%. All parameters improve not only in relative but also in absolute values.

The problem, however, remains on the issue of wages. Although in the last three months they have slightly increased (from 1.9% YOY to 2.0% YOY), they have been falling in real terms (by 0.5% according to the ONS data). The pound market has received today's readings as relatively positive. The entire report was optimistic and the slight increase in weekly payouts could be an argument for some BoE members to think about a rate hike. The weakened pound gained 0.3 percent in recent days. The value of the dollar and GBP / PLN returned above 4.75.

Stable zloty

The situation regarding domestic currency is still relatively calm. The lower value of the dollar and yields on US Treasury bonds mean that the USD/PLN fell below the 3.70 level in the morning. Also, the pound was quoted below 4.75PLN, ahead of better-than-expected data from the British labour market.

In the context of Janet Yellen's afternoon speech, the zloty should be relatively stable in relation to the euro. More volatility may be noticed on the pound or the dollar, but today's Fed chief's comments are unlikely to change the trends seen in recent weeks. Relatively limited impact on the zloty should be seen in the core inflation readings from Poland.