Daily analysis 16.05.2014

The EUR/USD slide has stopped despite mostly upbeat data from the US. Some scenarios may again decrease the volatility before the ECB June's meeting. Both solid GDP reading and current account surplus didn't help the zloty to keep the gains till the day's end.

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

• 14.30 CET: Housing starts and building permits from the US (980k and 1.02 million respectively).
• 15.55 CET: Consumer confidence Reuters/University of Michigan index (survey: 84.5 points).

Sliding pause and simple theory

It was quite a surprising session on the EUR/USD yesterday. Firstly, we received really weak GDP readings from the Euro-area, where instead of 0.4% growth q/q the 18-country-block recorded only 0.2% expansion. Another publications didn't favor the common currency. Both jobless claims from the US (revisited area under 300k) and inflation (the core doubled the estimates) were dollar-positive. It is also worth noting that the CPI climbed to 2% what is a comeback to the highest levels measured in 2013. Despite that the Federal Reserve mainly tracks the PCE price changes (1.2% in march; for April no data yet), we can imagine that also the FED's favorite inflation indicator may get close to the target (bullish for the greenback).

Despite solid data from the US, the sliding move on the EUR/USD was stopped at 1.3650. Later on the bulls got even a good excuse to generate a rebound. The industrial production readings were much below the expectations (minus 0.6% m/m vs consensus 0.0% and capacity utilization 78.6% vs 79.2 in surveys). In result we returned above 1.3700 at the day's end.

Besides a typical correction move of the recent slides investors might have started to evaluate a following solution. If the Euro is pushed down by market forces, there may be less pressure on the ECB to make some aggressive moves. Lower European currency valuation means higher import prices and therefore some more upside pressure on the inflation. Moreover, the weaker Euro gives some competitive edge for local companies, so these two issues are getting resolved. However, the downside pressure is limited as a large deprecation may discourage Draghi and his colleagues to make any move at all (and no move is of course Euro-positive). On the other hand, any attempt to push the Euro higher can should assure bulls that the ECB can use to most powerful bazooka. In result, the EUR/USD may be forced to range trade till the Central Bank meeting on June 5th.

Summarizing, the Thursday's session showed that the sliding appetite can be limited and the base case scenario till the ECB meeting may be traded close to the current levels. Today it is worth focusing on the conditions of the housing market (Janet Yellen recently has mentioned its weaknesses; can be dollar-bearish if fails to meet the expectations) and consumer confidence index which on the other hand can help the greenback if we hit above 85 mark (more than six-year high).

Missed opportunity

The Polish economy added pretty encouraging balance of payments data to already solid GDP reading. According to the NBP data, in March we had current account surplus at more than 500 million Euro What is also worth noting, most of the number was accounted from higher export over import (healthy economy sign). There is yet another interesting fact. The official trade data closely matches with estimates from KUKE (Export Credit Insurance Corporation) published almost two weeks ago, which can be quite a good leading indicator both for the GUS and NBP data.

Besides “hard data", we had also a Polish Press Agency interview with Alicja Zielinska-Glebocka. The MPC member told PAP that the April low inflation reading can be a one-time effect closely connected with “food prices” and the core inflation was not that weak. According to Zielinska-Glebocka, “a need to adjust the monetary policy (raise the interest rates – author's note) may be present in the first half of 2015 but we will see whether it will be Q1 or Q2”.

Despite the solid data from the Polish economy and some less dovish than expected comments from the MPC member the EUR/PLN wasn't able to hold around 4.18 till the end of the day. The zloty's weakness was unclear. It could be a result of weakness from the US equities of a simple failure to drop below 4.17. Some confusing signals were received from other currencies in the region. The Hungarian forint also was under pressure but the Russian rouble was pretty strong (by the way it is higher than it had been before the Ukrainian-Russian-West tension started)

Summarizing, due to yesterday's “missed opportunity”, we may be under some pressure on the zloty, however, the 4.20 level on the EUR/PLN and 3.45 on the Swiss franc should not be exceeded. In the following week we should still remain between 4.17-4.20 per the Euro and 3.42-3.45 on the CHF/PLN pair.

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

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