Euro still relatively strong (Afternoon analysis 29.06.2018)

Today, positive sentiment dominated the market. The euro was clearly appreciating at the expense of the dollar. However, inflation in the US turned out to be higher than expected, which in the long term may support the US currency.

US inflation surprised

In the afternoon, a positive sentiment continued in the market. The main market indexes in Europe gained about 1%, as did the euro, which was clearly stronger in relation to most currencies. This was a result of the EU's internal agreement on migrants rescued at sea. Data on consumer inflation (CPI) in the eurozone also was in line with expectations. According to preliminary estimates by Eurostat, inflation increased to 2.0% year-to-year in line with the market consensus and its core index (excluding energy, food, alcohol and tobacco prices) declined slightly to 1.0%, also in line with expectations.

Some confusion during the day was caused by media reports about the US membership in the WTO (World Trade Organisation). According to this information, President Trump was supposed to tell his advisers that he wanted to leave the WTO. If this were true, it would ruin the positive sentiment in the market. However, shortly afterwards, Steve Mnuchin, the treasury secretary in the White House, denied these reports.

A significant publication, however, which has so far had a limited impact on the dollar, was the PCE inflation in May in the United States. This is the type of inflation that the Federal Reserve takes into account in its projections. Its core index (excluding energy and food prices) increased to 2.0%, 0.1 percentage points above expectations. This is the highest rate of inflation growth in just over five years.

This limited reaction to the inflation data is probably the result of a good sentiment and a strong euro today. It should be remembered that the May data (soon consumer inflation for June will be published) and the Federal Reserve has already raised interest rates and increased the expected rate of increase this year. On the other hand, it confirms the positive trend in inflation in the US economy, which should strengthen the US currency in the long term, especially if inflation remains subdued in the eurozone.

Changes in the zloty were limited during the second part of the day and its quotations in relation to the main currencies oscillated around the previous day's levels. However, the globally stronger euro meant that the EUR/PLN exchange rate increased from the morning level of 4.35 to 4.37. The zloty's quotations will depend to a large extent on what will happen in the evening during the session in the US. If we do not observe a significant change (to the worse) in market sentiment and the dollar does not appreciate, and the main market indexes do not start to lose, the changes on the zloty may not be significant.

Next week's preview

The two publications related to the US economy will probably be the most important events next week. On Thursday evening, the Federal Reserve will publish minutes from the last meeting of the Federal Open Monetary Committee (FOMC). The last FOMC meeting decided to raise interest rates, but this was highly expected. On the other hand, it was a slight surprise that the median of the expected number of rises this year was raised from 3 to 4, which was one of the factors that contributed to the relatively stronger dollar today (another was the ECB's attitude towards interest rates). The market may focus on how much the hawkish tone in the discussion of the FOMC members.

Although the dollar's volatility is likely to increase around minutes' publication, it will be necessary to wait until the next day before the visible reaction to the dollar. At 2.30 p.m. on Friday, the Labour Department will publish a monthly report on the labour market for June. Of course, data on changes in employment in the non-farm sector will be important, but focus will be drawn to data on average hourly wages. Now, the median of expectations shows an annual growth rate of 2.8% per year, when in May it was 2.7%. It seems that the deviation by 0.1 percentage point may cause a significant increase or decrease in the dollar's quotations. The worst case scenario for both the euro and the zloty would be a faster than expected increase in average wages, which could suggest a stronger inflationary pressure. This could widen the gap in the pace of monetary tightening between the US and the eurozone and Poland. As a result, at the end of the week, the zloty could be subject to significant supply pressure.