Daily analysis 25.07.2017

Better and better sentiment in the biggest economy in Europe – the sentiment among German companies climbed to record highs in July. Political factors were seen still greatly influencing the zloty.

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

• No macro data that can clearly influence the analyzed currency pairs.

Only small changes to the euro – EUR/USD close to 1.165

The Ifo Institute published a report today in which it said that the business sentiment index among German companies rose to historical highs reaching 116 pts, compared to 115.2 pts a month before. The current assessment and expectations components both increased compared to June. The former also achieved the highest level since the German reunification.

The sentiment rose in the manufacturing, construction and wholesaling sectors. However, it decreased among retailers both with respect to the current assessment of their business as with their short-term business outlook. It's worth pointing out that their overall sentiment still remained at elevated levels.

Today’s readings were yet another portion of data confirming the particularly positive condition in which the Europe’s biggest economy currently found itself in. It's the heart of the euro area and mainly driving its growth as well. The European Central Bank (ECB) in its recent statements and press conferences has been very optimistic regarding the economic growth outlook in the single currency area.

The gradually flowing solid data (often surpassing market expectations) regarding the German economy affirm this view, giving the euro more arguments to sustain its favourable valuation. However, it has partly been caused by a fast-depreciating dollar, which could see a similarly swift rebound in the case of solid inflation and/or wages growth data.

Should the improving condition of the eurozone’s economy and its growth be accompanied by a sustained growth in the underlying inflation (excl. most volatile prices like energy or food), the ECB could suggest a gradual tapering of the QE (quantitive easing) in its next statements. Such a scenario, if it came to pass, could bring about an appreciation of the euro. Hence, the next inflation data regarding the euro area could generate some increased volatility.

Zloty’s wide range of fluctuation

The Polish currency gave back most of the gains yesterday evening generated after the news broke out that the Polish president will veto two (out of three) bills. We mentioned in our previous comments that zloty’s valuation could be mostly dependent on political factors and may also be subject to increased volatility. The impact it has on Poland’s currency has been proportional to the (substantial) coverage the issue has received in both the foreign and Polish media.

The EUR/PLN pair traded at approx. 4.26 around midday and USD/PLN at approx. 3.65. Despite the recent slump in zloty’s value, it was still 3% stronger in relation to the dollar than a month ago – although it was mainly due to the global weakness of the US currency.

This could potentially change in the coming days. On Wednesday, FOMC will publish a statement on the monetary policy, including the interest rate levels (which are poised to remain unchanged). We expect a significantly increased level of dollar’s volatility around the time of publication, including on the USD/PLN pair. However, the statement could ultimately have a relatively neutral impact. The members of the US monetary committee don’t have many arguments that could support a hawkish statement which could lead to the dollar gaining in value (in the form of positive inflation and/or wage growth rate readings).