Dollar starts paring losses (Afternoon analysis 29.08.2018)

The US currency pares some losses, however, it is still a long way from the levels recorded two weeks ago. The GDP revision may help in this respect - the US economy grew at a 0.1 percentage point rate higher than initially thought.

EUR/USD falls below 1.17

After reaching monthly weakness highs of the dollar against the euro, today the dollar appreciated. Before 3:00 p.m., the euro was quoted at around 1,166 p.m., compared with 1,173 in the afternoon from yesterday. The base case scenario still assumes a gradual dollar appreciation caused by the interest rate increase and a very good economic and labour market situation, in relation to the eurozone.

This argument was supported by the US GDP growth pace revision for the Q2, published today. The Bureau of Economic Analysis (BEA) increased the pace of economic growth to 4.2% per year, 0.1 percentage points above the preliminary data. Although this is a small revision, and history has shown that BEA very often changes this data, in the context of the dollar strengthening today, it may slightly increase its rate of paring losses.

Today, the stronger dollar put significant pressure on the emerging countries' currencies, including the zloty. The EUR/PLN quotations increased to nearly 4.29 today, although yesterday they even dropped below 4.27. This is not a strong weakening and is within the fluctuation range seen since last Friday, however, the probability of further drops of the zloty increases.

Recent records on the US trading markets will be very difficult to maintain and the recovery of increases by the main market indexes combined with the appreciating dollar will put pressure on the whole zloty's basket. The trade issue between the US and China, which will not be resolved quickly, remains a pending problem. This may result in a deterioration of global sentiment, which, combined with a potential response in the share market, may increase risk aversion and contribute to the outflow of some capital from emerging countries.

Tomorrow's preview

At 2:00 p.m., Destatis will present preliminary consumer inflation data (CPI) for Germany in August. The median of market expectations indicates a 2.0% year-on-year reading, similarly to July. Since May, when inflation amounted to 2.2%, it has been gradually falling. A decline in the average price level to below 2% per year in the largest European economy could also suggest a weaker inflation rate in the eurozone as a whole and somewhat weaken the single currency.

Half an hour later, probably the most important macroeconomic publication of the week will be published. The Bureau of Economic Analysis (BEA) will present data on PCE inflation in the US in July. The recent weakening of the dollar is caused by the comments of President Donald Trump and a more profound interpretation of the speech by the Fed's chairman during the symposium in Jackson Hole, which was perceived by the market as a slowdown in the growth pace of interest rates.

While this seems that this interpretation is exaggerated (there is no real suggestion that this will be the case in the long term), the inflation data that the Federal Reserve takes into account in its projections may slightly revise this view. An increase in core inflation (excluding energy and food prices) to 2.1% would mean its highest level in nearly 6.5 years and could cause a rapid return to the upward trend on the dollar. Less than 2% could give an additional argument to the dollar sellers, which could further weaken it. A reading at the consensus level of 2.0% could change little during the day, but it would support a gradual dollar appreciation.