Data and trade (Daily analysis 05.07.2018)

Suggestions from some ECB members about too late valuation of the interest rate increase by the market and improved readings from Germany support the EUR/USD. Key days for trade and important macroeconomic readings.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• At 14:15: Change in employment in the private sector according to ADP survey (estimate: 190 thousand),
• At 16:00: ISM from the US service sector (estimate: 58.3 points),
• At 20:00: Minutes from the Federal Reserve June meeting.

Support for the euro

After many days of stagnation, the main currency pair shows signs of greater volatility. The European currency was supported yesterday by media reports of some ECB members' dissatisfaction with the late market valuation of the first interest rate increase (late 2019).

However, this dissatisfaction may be surprising, as the communication suggests that the rates will remain unchanged at least until September 2019. The valuation of this movement at the end of next year therefore seems more or less to correspond to the general message from the ECB. Moreover, the shift in valuation by 2-3 months (an increase of only 0.1 percentage points) is a symbolic change when taking the whole monetary policy into account.

The second element supporting the euro exchange rate is good data from the key EU economy. Orders in German industry increased by as much as 4.4% annually in May, and data for April were revised upwards from minus 0.1% to 0.8%. We will see if this will translate into an equally strong rebound in industrial production (data for tomorrow), but this is certainly a positive signal.

At the moment, the market seems to be getting used to the fact that tomorrow both the USA and China will introduce the first round of customs duties. Although this is a negative sign, the fact that duties are in force for a short period of time (which is what the market expects) will not cause a breakdown in foreign trade and an increase in GDP.

On the other hand, it is important to keep in mind the possibility of the trade conflict escalation. The inclusion of further imports from China (even the entire Middle Kingdom trade with the United States is speculated on) will already be a significant event, the consequences of which the market does not value. Hypothetical restrictions on trade between the US and the Union are also not included in prices, as are major problems within NAFTA. Therefore, as long as the greatest risks connected with trade are not overcome, the nervousness in the market will persist and sentiment may deteriorate very rapidly.

The zloty and other EM currencies gain

Since the morning, the Polish currency has been gaining. On the EUR/PLN we are already in the range of 4.36-4.37. Generally, a stronger appreciation is observed on the forint, among others. In addition to foreign trade-related issues, which may rapidly change the market sentiment, attention should also be paid to publications from the USA (ADP and ISM from the services sector) and "minutes" from the FOMC meeting in June.

Investors may ignore ADP or ISM data and look forward to a record from the last FOMC meeting, which could be negative for the dollar due to the expected broad discussion on the negative economic impact of foreign trade imbalances. As a result, this may weaken the dollar in the short term and paradoxically even help the zloty. However, over the next weeks or months, the zloty may still remain under pressure if the negative scenario in the context of foreign trade starts to materialise.