Daily analysis 15.07.2014

Dovish Draghi, but with no major impact on the EUR/USD. The market has been waiting for the Yellen testimony. German ZEW and US data. The pound is gaining some value after the inflation report. CPI publication from the Polish economy and Fed's chairwoman hearing should shape the zloty today.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 14.00 CET: CPI from Poland (Polish Press Agency estimates at +0.2% y/y).
• 14.30 CET: Retail sales from the States (survey: both headline and excluding transportation reading at +0.6% m/m).
• 16.00 CET: Janet Yellen testimony before the US Senate Banking Committee.

Draghi. Yellen. The data

Draghi's Q&A before the European Parliament had much lower impact for the market than, for example, ECB conference after a rate decision. We can say that the most important statement which got into the headline was that “QE falls squarely in our mandate”. It means that the central bank president still wants to keep in his portfolio a stronger bazooka to either calm the appreciation trend of the Euro or to decrease risk of deflation and prevent the economy to slump.

The ECB chief also noted that “in the present context, an appreciated exchange rate is a risk to the sustainability of the recovery”. Draghi wants to avoid both the downward pressure on inflation and the competitiveness disadvantage from a stronger currency. During his meeting there was also a question regarding his resignation. The central bank president dismissed all the rumors concerning his departure. Overall his appearance before the Parliament was quite dovish but lack of the market reaction can be explained by Tuesday's Yellen testimony.

The reference point to the Fed's chairwoman hearing before the Senate Banking Committee will be Lockhart's comments cited by us yesterday. According to the Federal Reserve President from Atlanta Yellen should suggest that the interest rate should be raised in the 2nd half of 2015 and the monetary policy is not the best tool to deal with asset bubbles. Dovish Fed's stance can be also strengthened by dismissing the threat of inflation and putting the recent employment data a bit on the downside claiming that “that there is still a lot of slack in the job market”.

Besides Fed we received some interesting data from Europe. Inflation in the UK rose to 1.9% y/y (the core topped 2.0% y/y) in June, while economists surveyed by Bloomberg expected a reading around 1.6%. The publication increases the odds for an earlier hike by the BoE what pushed the cable toward the recent highs around 1.7150.

Another time we got weaker report from Germany. The ZEW index dropped to seven months low at 27.1 (expectations were around 28 points). Commenting the data the Institute wrote that “Germany has experienced a slight dent economic activity recently – retail sales declined and industrial production as well as incoming orders dropped. The current decrease of the ZEW Indicator of Economic Sentiment reflects this sobering development. On a general note, however, the medium-term economic outlook remains favorable”.

Summarizing the Euro was under a slight pressure in late morning. A bit more dovish Draghi, strong pound and weaker than expected readings form Germany pushed the EUR/USD below 1.3600 level. However, the day is not over yet and we have to see how Janet Yellen is going to perform. If she sounds more hawkish it is possible, the Euro might drop even below 1.3550 while in a scenario of dovish message we should easily return above 1.3600.

Inflation in the spot

Monday's Balance of Payments data was pretty surprising. According to our recent analysis (based on the KUKE report) the export increased significantly (over 11%), but the trade balance was relatively low (+176 million Euro) due to a sharp rise of import (10%). If the foreign purchases go to investment good it should help the economy, but fact that we may head toward the deficit (assuming that all other parts of BOP remains unchanged) it can be a negative for the PLN.

Today investors should be focused on inflation data. The PAP consensus shows that the CPI reading should be around 0.2% y/y. Taking into the account the food prices fall and that the higher gasoline prices were at the end of the month we may assume that the reading may be even lover. If that happens the EUR/PLN can rise toward 4.15 and CHF/PLN should head toward 3.42.

Expected levels of PLN according to the EUR/USD rate:

Expected GBP/PLN levels according to the GBP/PLN rate: