Dollar under political pressure (Afternoon analysis 20.07.2018)

The US currency depreciates after the US President statements. The zloty appreciates, but the sentiment deterioration in the share market in the evening may have a negative impact. End of next week's relevant for currency market: ECB meeting.

EUR/USD again breaches 1.17

Friday's session was not rich in macroeconomic publications important for the broad market. However, the market was mainly influenced by political factors. Yesterday's statement by US President Donald Trump about his preference for a weaker dollar and lower interest rates clearly burdened the US currency today. The EUR/USD quotations moved away from the 1.16 boundary, reaching 1.17 before 3.00 p.m., the upper limit of the last three days.

Today, CNBC, the US TV station, published part of an interview with Trump, in which he expressed readiness to put customs duties on imports from China worth 505 billion USD. This caused a wave of sales, mainly on the share market, but the dollar also started to depreciate. Although in the long run, customs wars would probably be positive for the dollar (other countries would simply lose more than the US), a renewed increase in political uncertainty in the short term may burden the US currency.

A weakening dollar is good news for the zloty, especially in the context of the highest pace of retail sales growth in Poland for nearly 1.5 years. Today, the zloty clearly appreciated against the basic currencies, although on the other hand, it only partially pared the losses of recent days. The euro was quoted around 4.32 (approx. 0.03 PLN higher in the morning). The relatively weaker dollar may boost the Polish currency, but the tensions between the US and China and the EU on trade issues should not be forgotten. These may have a negative impact on the share market. If a strong weakening is observed in the US exchange in the evening, the zloty may lose today's profits.

Next week's preview

Tuesday may be an important day for the euro (and indirectly for the zloty). The IHS Markit will publish preliminary PMI index data for the eurozone industrial and services sectors. In both cases, slight decreases are expected, similar to France and Germany. The slowdown in the activity growth pace in these sectors results in higher than 0.1 - 0.3 percentage points decreases in PMI indexes, which may exert negative pressure on the euro. Negative news from the eurozone may also burden the zloty, which, despite good data from the Polish economy this week, has become more sensitive to external factors.

The ending of the week will be equally important. On Thursday, after the two-day ECB meeting, a statement on monetary policy will be presented. Changes in interest rates or the asset purchase program are not expected. Perhaps, the ECB would like to clarify the message on interest rates that appeared a month ago, which said that interest rates would remain unchanged at least during the summer break (the Polish translation was even more ambiguous). Around the publication time and the subsequent press conference of Mario Draghi (President of the ECB), more volatility in the currency market is expected. In particular, if such clarification actually occurs (for example through the questions from journalists).

On Friday, the Bureau of Economic Analysis (BEA) will publish preliminary GDP growth pace data for the US in the Q2. The median of expectations indicates a significant increase - from 2.0% in the previous quarter to 4.1%. In addition, more volatility in the dollar around publication time can be expected, especially if it differs from the market consensus. The resulting changes in dollars related to BEA data may be limited. Publications from previous periods have shown that preliminary readings may differ significantly from final readings.