Daily analysis 25.07.2016

The Ifo Business Climate index was a positive surprise despite a depreciation. It indicates that the German economy is not sensitive to Brexit. An interesting week with the Fed, BoJ and the American GDP is ahead of us. Stabilization is the base case scenario for the zloty.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

• No macro data that could significantly impact the analyzed currency pairs.

Condition of German economy remains positive

The financial markets are beginning this week in relatively positive sentiments. The S&P500 terminal contracts reached their historical record during the Asian session. The majority of the European stock market indexes are growing as well. The publication of the Ifo Business Climate index for the German economy was also positive. Despite a slight decline (from 108.7 to 108.3 points) it was above the economists estimations and remained at decent levels.

The Ifo part that indicates the current as well as the future condition of German entrepreneurs, shows that the current sentiment is close to the 115 points level (near its four-year peaks). On the other hand, the component that shows the condition of enterprises for the past six months, went down from 103.1 points to 102.2 points (probably due to anxieties regarding Brexit). However, this level is still satisfying. Especially taking into consideration that due to anxieties regarding China from this year's beginning, the indexes were near the limit of 100 and did not translate to a clear limitation of the future condition.

On the other hand, production companies are estimating their current position positively, but at the same time are definitely less optimistic regarding their future condition. It's most likely caused by Brexit. The building sector is doing increasingly better. According to the Ifo Institute, it is yet again reaching new record levels. Sentiments of companies that are dealing with retail sales are relatively positive as well. Thus, the Ifo Institute opinion that the German economy proves its resistance seems correct. It is confirmed by the positive PMI data from the past week. On the other hand the weak ZEW publication was rather too pessimistic and too infected with the fear of Brexit.

Fed, data and statements from FOMC members

Meeting of two leading central banks (the American on Wednesday and the Japanese on Friday morning) is planned for this week. The second one is most likely to be more interesting. Especially taking under consideration that there is a large chance for modifying parameters of the monetary policy. Moreover, we will receive new macroeconomic forecasts. However, the Federal Reserve meeting will be more significant for the Atlantic region.

Despite that the FOMC announcement on Wednesday will not contain new macroeconomic forecasts nor will it end with a press conference, the description of economic situation should be relatively optimistic. Moreover, the Federal Reserve may initiate a few-stage preparations for a possible rate hike in September. A similar strategy was used in the second quarter after the meeting in April. Even though the FOMC has eventually abandoned it due to surprisingly weak data from the labor market and anxieties related to Brexit.

However, apart from the Fed announcement, the GDP reading from the second quarter is most likely to be positive as well. The Atlanta Fed estimations show a development at the positive 2.4% level in annualized interpretation. John Williams' statement is planned right after the GDP data on Friday. He has recently been one of the most optimistic members of the FOMC. If the GDP is positive, Williams may reveal some details regarding the Fed meeting in July. The FOMC representatives are very often heard on the media after the meetings as well.

We also expect to find out more about a serious discussion regarding the monetary tightening in September in three weeks from now. New testimonies from the Federal Reserve members are most likely to be relatively dovish, just as the testimony from Rosengren in May. Even if the monetary tightening doesn't happen in September, the time until that month may be favorable for the American currency.

Stabilization as base case scenario

Situation on the zloty remains neutral. The euro is close to the 4.36 PLN, and the franc is slightly above 4.00. Very positive data from the USA, as well as more hawkish than expected FOMC announcement may be a certain danger for the PLN condition. However, assuming that the publications are near the consensus and the Fed will walk towards more restrictive interest rates policy cautiously, the negative effect on the Polish currency should be relatively small and only limited to the dollar.

The additional element that protects from the general tightening of worldwide monetary conditions, are most likely the actions from the Bank of England, as well as the Bank of Japan. Thus, we are currently not expecting the amount of global factors to have a negative impact on the PLN. Stabilization remains the base case scenario.