Daily analysis 25.07.2014

Readings favor the dollar – multi-year low jobless claims and weak Ifo. Ukrainian government resignation should not influence the Kiev's policy. Russian central bank increases interest rates. The zloty remains fairly stable to the Euro but the dollar is trying to breach 3.08 level. Following days may bring some additional pressure to the PLN.

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

• 14.30 CET: Durable goods orders from the States (survey: +0.5% m/m and excluding transporation +0.7% m/m).

The data. Resignation. Ruble

Thursday's better-than-estimated readings from the Euro area gave some relief to the common currency but the afternoon jobless claims from the US and today's Ifo weak publication are weighting on the EUR/USD again. We still should not forget about the sanctions even though the implementation goes pretty slow, but if the draft presented in “Financial Times” is agreed we may expected further pressure on the Euro.

It is worth noting yesterday's jobless claims readings. The weekly data published by Labor Department dropped to the lowest level since February 2006 (286k vs 307k consensus). Additionally, the 4-week moving average slided to 302k (the least since 2007), what only confirms improving conditions of the job's market. There also were no technical issues regarding the reported numbers (as we had in the past when the reading was significantly deviated from the median). Investors should also quickly recall what Janet Yellen recently said during her testimony before the Congress: “if the labor market continues to improve more quickly than anticipated by the Committee, resulting faster convergence to our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned”. Therefore, if next NFP confirm record low jobless claims we should see the EUR/USD toward 1.3400.

The dollar strength was, however, slightly toned down by weak real estate data. The new home sales dropped to 406k, significantly below the consensus set at 475k. Additionally, the previous month reading was revised downwards from 504k to 442k. It is hard to say whether the negative trend remains in place in the following months, but the recent Fed's suggestions regarding that segment have been confirmed facts.

Besides the US data we got one of the most important indicator from the German economy. The recently published Ifo number is showing that corporations are feeling the pain from geopolitical issues. The index dropped to 108 level while economists predicted a fairly flat reading at 109.4. Bloomberg also points out, quoting Bundesbank, that Q2 might have been flat in Germany. A surprisingly weak publication pushed the EUR/USD close to the recent lows at 1.3450.

Thursday brought also some changes in Ukraine – the Kiev government resigned. W should, however, not expect any changes of attitude toward Moscow or Brussels. The new parliamentary election will probably confirm a tough stance toward Kremlin and it is possible that European-course parties may get a similar support as President Petro Poroshenko did.

Unexpectedly, the Russian Central Bank (CBR) raised interest rates third time this year by 50 bps (in total of 200 bps). According to the statement published on its website, the monetary tightening is a result of slower than expected inflation deceleration in July and “geopolitical tension and its potential impact on the ruble exchange rate dynamics”. The CBR probably also tries be ready for further sanctions which are expected to be implemented by both the UE and the US. In the environment of zero growth, the further policy tightening would put an additional pressure on the GDP, bet we are not expecting the Russian currency to be vulnerable to the weakness observed in the first half of 2014.

Summarizing, despite the negative data for the EUR/USD (solid job's market, geopolitical tensions, and weak Ifo), we should finish the week around 1.3450. A stronger sell-off is expected next week when we will probably see more severe sanctions from the EU (negative for the Euro) and firm payrolls (positive for the dollar). It is possible that in the following days we may expected 1.3400 test.

Debt auction. Sanctions. Euro Zone data

We are still moving in a fairly narrow range on the EUR/PLN. A slight weakness was observed just after the disappointing Ifo hit the wires, but the move was close to the recent volatility. There is much more action on the USD. The global dollar strength is pushing the USD/PLN pair toward multi-month highs and in the following week the greenback is expected to be worth 3.10 PLN.

In the following days we should also see some PLN weakness toward the Euro. Introducing the third round of sanctions on Russia is getting more and more likely. It would translate into the retaliation moves from Moscow, what may increase the issues with Polish export to the East. The macro data may also be pretty grim from the zloty – it is quite possible that the Polish PMI drops below 50 mark and solid payrolls brought us closer to the US tightening.

In result, we may see EUR/PLN around 4.16 next week (3.42 per the Swiss franc) and the dollar even slightly above 3.10 mark. Today, however, the trade will be still pretty calm and both the EUR/PLN and CHF/PLN should remain close to the current levels.

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

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