Polish zloty in good condition (Afternoon analysis 1.08.2018)

Heightened uncertainty about international trade with only limited impact on the currency market at the moment. Possible increase in US dollar volatility by afternoon US data. The Polish currency maintains a relatively good valuation in relation to the main currencies.

Small fluctuations on EUR/USD

We have observed relatively small fluctuations across the main currencies today, taking into account recent market events. These are mainly international trade issues and recent press reports on the tensions between China and the US. The White House Administration is trying to put pressure on China to impose a 25% duty on imported goods worth USD 200 billion.

The beneficiary of the whole situation so far is the zloty. Although its valuation in relation to the main currencies is likely to deteriorate in the long run, the dispute over international trade may affect Poland relatively less than other countries. This may support the zloty in the short term.

The lack of a clear appreciation of the dollar, despite the monetary tightening in the USA, also helps. The main currency pair, i.e. EUR/USD, moved during the last month in the range of 1.16 - 1.18 - a relatively narrow band, taking into account that it was four weeks. As an effect, the price for the euro has fallen today to around PLN 4.27, the lower limit of the exchange rate of the last month and a half.

However, such a positive scenario is unsustainable for the Polish currency in the long run. The potential escalation of the aforementioned conflict would eventually lead to an outflow of capital from emerging countries, exerting supply pressure on the zloty as well. A positive scenario of no escalation in turn will support the appreciation of the dollar, which is also negative for the Polish currency in the long run.

This afternoon, ADP published payrolls data in the USA in July. The 219,000 increase exceeded market expectations by 43,000, resulting in a slight appreciation of the dollar and pushed the EUR/USD to 1.17. Much more important today will be the publication of the PMI index of the U.S. industrial sector in July (from ISM) at 4 p.m., as well as the decision concerning the interest rates of the Federal Reserve four hours later.

Therefore, the range of fluctuations on the dollar, also on the zloty, may be expected to increase. In the case of a hawkish statement from monetary authorities in the USA and a good reading of the ISM (above consensus 59.4 points), the American currency could gain significantly. However, the chances of exceeding 4.30 on the EUR/PLN or 3.70 on the USD/PLN are low.

Tomorrow's preview

At 10:30 am, the IHS Markit will publish a PMI for the construction sector in the UK in July. A month ago, it reached its highest level this year (53.1 points), which is also the upper limit of this index from the last 12 months. The median of expectations indicates a reading of 52.8 points. Although the PMI above 53,1 points could strengthen the pound, the potential move is likely to be limited in view of the next event.

This will be the publication of the Bank of England's interest rate decision (1 p.m.). The main rate is expected to increase by 0.25 pp to 0.75%. This may trigger an initial strengthening of the pound, but the final reaction does not have to be positive at all.

The increase in the interest rate is already practically entirely priced in by the market, hence the expectations of the members of the Monetary Policy Committee as to the level of interest rates in the future will be more important. More will, therefore, depend on the statement itself- suggestions of a longer period of time (about one year or more) without a further increase in interest rates may weaken the UK currency. In addition, however, the Brexit process appears to have and will continue to have a greater impact on pound prices over the coming months.