New highs on EUR/USD (Afternoon analysis 16.02.2018)

The EUR/USD pair reached its highs in over 3 years and then reversed the growth and returned to yesterday's lows. The dollar strengthening was reflected in the zloty afternoon quotations, but the Polish currency was still in relatively good condition.

Dollar pared some losses

During the morning hours, the dollar set new lows in over 3 years. The dollar index (DXY), measuring its strength against the six main currencies, fell to 88 points. However, in the following hours, the dollar was gradually paring the losses and the EUR/USD quotations fell to around 1.244, which meant reversing all of yesterday's increases.

The global dollar weakening and positive sentiment on most European markets have translated into the zloty’s relatively strong condition. In the morning, the dollar cost slightly below 3.31 PLN, although its subsequent appreciation pushed the course upward by more than 0.03 PLN. The EUR/PLN pair's quotations also increased from 4.15 to 4.16.

In the following hours, the zloty situation will depend on dollar behaviour and quotations on the share market. Although Europe's main indexes were in the green, futures contracts for the US indexes suggested opening under the line. Deepening of these declines in the afternoon hours could increase risk aversion and result in a foreign capital outflow from emerging countries, including Poland.

The consumer sentiment index of the University of Michigan may be important for the dollar. The market consensus assumes a decline in its growth pace of 0.3 to 95.4 percentage points. However, this data will have limited impact on trading since investors have recently ignored most of the US economic readings.

Next week's preview

On Tuesday, the Polish Central Statistical Office (GUS) will publish January's data on industrial production and retail sales in Poland. Both indexes slightly failed to meet expectations in December: the production growth pace fell from 9.1% to 2.7%, while retail sales fell from 10.2% to 6% (on an annual basis). Growth above market consensus (8% and 7.3% respectively) could slightly strengthen the Polish currency, although potential changes may be limited.

The most important events next week will be the publication of records ("minutes") from recent US central banks and eurozone meetings. On Wednesday, minutes will be published by Fed, and even though no substantial changes are expected, the last relatively hawkish message from the Federal Reserve suggests that this will be the same case in the minutes. This is good news for the yields on US Treasury bonds and potentially for the dollar. Recently, the yields have increased while there was no simultaneous euro increase.

The following day, the European Central Bank (ECB) will also publish minutes from its last meeting. Mario Draghi's last conference was rather dovish in the case of its message. The euro could appreciate, if there were suggestions about the end of the asset purchase program. However, the chances for this scenario are limited. Instead, the minutes raise the issue of the euro's excessively high exchange rate, which in turn, may hamper inflation return on an upward trend.

However, it seems that the perspective of at least three rate hikes in the US, combined with a relatively dovish message from the ECB, may strengthen the dollar in the second part of next week. This could weaken not only the USD/PLN pair but the entire zloty basket.