Huge wages increases in the US (Afternoon analysis 02.02.2018)

Wages in the USA have been growing at the fastest pace for more than 8 years as the dollar appreciated with rising yields of the US Treasury bonds. Currently, the zloty is depreciating slightly but the continuation of the US currency's upward trend may put more pressure on it in the following hours which may result in greater losses.

Is it the end of a weak dollar? The EUR/USD pair fell down

The market received long-awaited data as the US Department of Labour published January's labour market report. As expected, the unemployment rate remained at 4.1% for the fourth consecutive month. However, much more important data in the context of the labour market condition and dollar valuation positively surprised.

Employment in the non-farm sector increased by 200k, 20k above expectations, and December's data was also revised upward by 20k. This is below Wednesday's reading of 234k by ADP, although the correlation between this data is relatively limited.

Most certainly the wages data was most influential from this report. The average hourly wage increased by 2.9% per year, although an increase of 2.6% was expected. This is the fastest yearly increase in average wages in the US since mid-2009. This may suggest a higher wage pressure on inflation, which would also go along with the somewhat stricter rhetoric noticed in the recent Federal Reserve statement.

As a result, the yields on the US government bond increased significantly. Yields of those maturing in 2 years increased to the highest level in 4 years (approx. 2.84%). The dollar has followed the increases this time, which appreciated noticeably. Before 3.00 p.m. the main currency pair's quotations fell from 1.25 to 1.244, which may be a signal for what the market awaited in order to appreciate the dollar. In combination with the latest rhetoric of the Fed, the EUR/USD quotations may gradually move towards the 1.20 boundary in the coming weeks.

Will zloty be under pressure?

The zloty may lose value due to better macroeconomic data from the USA and the growing dollar. Especially if a downward trend in equity markets is continued. The futures contracts for the main US indexes again indicate opening near 1% below yesterday's closing level. Dollar appreciation combined with share price depreciation may exert a significant pressure on the zloty later in the day, which may cause the profits made in the recent weeks to be lost.

If the upward trend on the dollar continues next week, a statement from the Polish Monetary Policy Council next week may be important for the zloty (more below). Today at 4.00 p.m., December's data on new orders in the industrial sector in the USA will be published. If it is above expectations (growth above consensus of 1.5% MOM), another sign supporting dollar appreciation will be noticed.

Next week's preview

Next week may determine zloty and pound quotations. On Wednesday, the Polish Monetary Policy Council will present its decision regarding interest rates. Although it is not expected to change, a press conference with Adam Glapiński, President of the MPC, may be interesting. Recently, a hawkish message was received from the Federal Reserve (USA), inflationary pressures in Poland seem to be rising (i.e., high wages growth pace and consumption). Moreover, oil, which has a significant impact on global inflation, has recently reached almost 3-year highs in prices. If the MPC's message is still accommodative in this context, the zloty may depreciate a bit. A deeper depreciation may be noticed, if a rise in the dollar value is observed, which is likely to appreciate in the long run.

In turn, on Thursday, the Bank of England's monetary committee will present its decision on monetary policy. Neither interest rates nor the number of monthly bond purchases is expected to change. However, the distribution of votes may be a key factor - separating from the rest, even by one member, and a vote in favour of increases could be a positive impulse for the pound. At the same time, the Bank of England's report on inflation will be published. It has been maintained in recent months close to 3%. However, if the projections indicate a further, faster than expected price growth pace, the probability of rate hikes may increase, which would be another positive sign for the pound.