Dollar still weak (afternoon analysis 28.08.2018)

The US currency is the weakest to the euro since the end of July - the EUR/USD pair is above 1.17. The zloty benefits from the dollar's weakening as well as from a good sentiment on the share markets, which indicates a lower level of risk aversion.

Dollar will go up in green but not today?

Tuesday's session was characterised by the dollar's weakness at least until 3:00 p.m. The EUR/USD exchange rate rose to its highest level since the end of July, above 1.17. Yesterday, the US-Mexico agreement led to a clear improvement in sentiment and the achievement of historic Nasdaq and S&P 500 indexes. Increases on the European trading markets were no longer so strong, but positive moods were still visible, and the main indexes remained at over two-week highs.

This is an ideal environment for the zloty. It did not appreciate in relation to the main currencies as it did yesterday, but it still remained in good condition. The EUR/PLN quotations oscillated around 4.27, close to the lower limit from August 9th. However, the potential for further zloty's appreciation seems to be limited.

The optimism of the share market is probably exaggerated. There is still a much more important issue of trade conflict between the US and China which remains open and will not be resolved quickly. The market interpreted the words of the Fed's chairman at a symposium last Friday as suggesting a slowdown in interest rate growth.

Nothing points to a change in the pace and the macroeconomic data from the US economy does not support this hypothesis either. After the initial optimism, the dollar should enter the appreciation path, and the US indexes will find it very difficult to maintain the levels of historical records, therefore they will return a part of their profits.

This may cause a slight zloty's depreciation, although potential changes should not be significant. The zloty is supported by good macroeconomic data from the Polish economy. If the data was supported by better than expected data from both Germany and the eurozone, the zloty's potential for depreciation would be further limited.

BEA's trade balance data published this afternoon will definitely not help the dollar. In July, the deficit (seasonally adjusted) was 72.2 billion USD, 3.6 billion more than the median of market expectations. It was the highest level since February. The low result was driven by export, which was lower by 2.5 billion USD than in June (seasonally unadjusted was lower by 11.8 billion USD), with a simultaneous increase in imports by 1.8 billion USD.

Tomorrow's preview

At 8:00 a.m., the GfK will publish German consumer sentiment index data. A median of market expectations suggests that this index will remain unchanged at 10.6 points. However, taking into account the business sentiment index published by Ifo yesterday, which exceeded market expectations (the highest since March), the GfK index could also turn out to be higher than the consensus. Although both are 'soft' indexes based on surveys, their positive readings may suggest a better than expected second half of the year of Europe's largest economy. Although the impact is rather limited, a reading above median expectations from the GfK could strengthen the euro, especially in the context of a weakened dollar.

At 2:30 p.m., the Bureau of Economic Analysis (BEA) will present the GDP growth pace in the USA in the Q2. This will be the second reading - the first one pointed to 4.1% year-on-year, so no significant changes should be expected (the market consensus assumes a similar growth pace). However, when looking at the history of BEA publications, it is uncommon that subsequent readings were not in line with previous ones. The deviation would have to be greater than 0.2 percentage points in order to trigger significant changes in the dollar's quotations.