Daily analysis 27.06.2017

Mario Draghi’s speech in the Portuguese Sintra markedly strengthened the European currency. A significant deterioration of consumer confidence in the UK after the parliamentary election. The zloty keeps recent gains. The dollar is pushed lower also to the PLN.

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

• Today and tomorrow: Central bankers forum in Portuguese Sintra. Comments from the ECB members and possibly from other MPC members to the media,
• 15.00: S&P CoreLogic CS house price index (estimates: +5.9% y/y),
• 16.00: Conference Board consumer confidence index (survey: 116 points),
• 19.00: Janet Yellen, Federal Reserve chair is scheduled to speak in London.

Draghi pushes the euro higher

Shortly after 10.00 am CET, the European currency significantly strengthened. The EUR/USD rose from around 1.1190 to 1.1260. It was clearly a reaction to Mario Draghi’s speech in Sintra, Portugal. We can find three elements which caused the increase of the common currency.

First of all, there was a broad based optimism in the ECB chief comments. Draghi said that “now, the global recovery is firming and broadening”. He also stressed the increasingly favourable situation on the labour market (employment growth, unemployment fall) and the fact that the eurozone enjoyed 16 straight quarters of growth.

Draghi also emphasised the existence of reflation forces. He told the audience that “The threat of deflation is gone and reflationary forces are at play”. Even though, he also underlined that the reflation pressure was slowed by external factors, but the overall message suggested that there may be some room to limit the monetary stimulus.

The third and probably the most important point was that current low inflationary pressure is a result of an external factor (commodity prices) and is temporary. This message contradicted with the most recent ECB projections published after June’s meeting where estimates for both headline and core inflation were lower. Investors decided, however, that external elements (commodities, uncertainty, politics) will abate and the inflation may be generated from wage rises and higher capacity utilization. Finally, it would be a fairly strong signal to reduce some accommodation from the ECB which should result in higher yields in eurozone countries and stronger common currency. Market reaction seems to be justified.

Deterioration of consumer confidence in the UK

The pound has been affected by many factors in the recent weeks. From the parliamentary election in Britain through Brexit negotiations with Brussels ending with a less dovish stance from the BoE. Some more uncertainty can be seen also from today’s YouGov/CEBR survey on consumer confidence.

According to the research consumer sentiment dropped from 109.1 points (1-8 June field work) to 105.2 points (9-21 June). It is the lowest level since the EU referendum was held in June 2016 (104.3 points). Moreover, this is the second lowest result since the summer of 2013.

It is difficult to say whether this study will translate into a reduction in consumption by British households. The jobs market remains very strong so it is possible that after an initial slump consumers may continue to spend as they did after the EU referendum. The study, however, may slightly reduce hawkish suggestions by some BoE members at least till the moment “hard data” occur.

Zloty remains strong

The zloty maintains recent gains in the morning trading. The EUR/PLN is quoted close to 4.21 level and the dollar is falling below 3.75 mark. In the 31 currency ranking of developing and developed countries the PLN is the strongest one. It gained around 2 percent to the dollar and its result was followed by South African rand and Mexican peso which strengthened 1.4 percent.

However, solid results of the Polish currency should not be considered with its internal strength but rather by global sentiment and future interest rate path abroad. For example, in the period of 9-15th of June the zloty was the weakest among 31 currencies and lost around 1.5 percent to the dollar. It is worth noting that if the domestic economy was weaker, the volatility in the PLN would have been even greater.