The US economy grew faster than expected. Labour costs also increased above expectations in the same period. The zloty rebounds some of the losses, but positive data from the USA and the potential dollar appreciation may pose a threat to the Polish currency.
Wages are growing in the US
In the afternoon, preliminary data on the US GDP growth pace in the Q1 of this year was published. The largest economy in the world grew in this period by 2.3% yearly, compared to the expected level of 2.0%. At the same time, the Labor Department published data on employment costs in the Q1, which also positively surprised with the increase by 0.8% quarter-on-quarter. On a yearly basis, this meant an increase of 2.7%, the highest in nearly 10 years.
This may increase the probability of more than three (in total) rate hikes this year in the US. In the context of weaker data and sentiment in the eurozone, this is also a positive signal for the dollar. In theory, this may be negative for the zloty at the same time. It also depends on the sentiment observed today in the US market.
If the main indexes had grown and the positive sentiment that was present during the European session had been maintained, the potential changes in the zloty could have been limited. A worse scenario for the zloty would be an increase in yields of the US Treasury bonds combined with a growing dollar, while the main market indexes in the USA would decrease.
This could reverse the slight reaction of yesterday's losses that are observed on the zloty from the morning hours. The USD/PLN quotations went back from the 3.51 PLN to about 3.485 PLN around 3:00 p.m. Moreover, the EUR was 0.02 PLN cheaper than in the morning - the EUR/PLN was just above the 4.21 PLN boundary.
However, the zloty gained the most to the pound - around 9:00 a.m., the British currency cost 4.87 PLN, while six hours later it was already over 0.07 PLN less. This is mainly due to worse than expected data on the UK's GDP growth pace in Q1 (the weakest since 2012) and a further decrease in the likelihood of interest rate hikes in May.
Next week's preview
Next week may be important for the currency market. On Monday, the dollar may receive an additional boost to appreciate. The Bureau of Economic Analysis (BEA) will publish March data on PCE inflation, it is important as it is the type of inflation that the Federal Reserve takes into account in its projections. The median of market expectations indicates a reading of core inflation (excluding energy and food prices) at the level of 1.8% a year, compared to 1.6% a month earlier. This increase would be mainly caused by lower base last year (when it fell from 1.8% to 1.6%). A reading above the consensus could support the dollar and, given the current weakness of the euro and cause further falls in the main currency pair (EUR/USD).
On Thursday, the consumer inflation data (CPI) for the eurozone will be published for April. This will be a preliminary reading, but in the context of the ECB last meeting, this publication may trigger relatively significant movements against the euro if it deviates from the consensus (1.3% per year of the main index). The fall in the core index below expectations might have been particularly painful for the euro and at the same time may support the dollar. Such a scenario could also be negative for the zloty.
On Friday, the US Department of Labor will publish a monthly report on the labour market. The market will focus on employment and wage data. However, it seems that the market will focus on assessing the probability of the number of rate hikes this year. This data may be extra important if PCE's inflation was above consensus. Confirmation of the stronger inflationary pressure by a faster than expected increase in average hourly wage could result in both an increase in US bond yields and dollar's appreciation. Such combination of inflation and the labour market report would also be bad the zloty. The Polish currency could deepen the current drops, taking into account its internal vulnerability.