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Rebound on the dollar (Daily analysis 22.06.2018)

22 Jun 2018 13:16|Marcin Lipka

The EUR/USD clearly exceeds yesterday's morning trade. PMI indexes from the euro zone have increased, but manufacturing production and expectations for the coming year are still at a low level for many months. The zloty pares some of the losses due to the weaker dollar, but optimism on the emerging countries' currencies remains fragile.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • A lack of macro data may noticeably impact the analyzed currency pairs.

Stronger dollar

The currency market has been captivating over the past few hours. The pound's appreciation can be explained by the prospect of a more hawkish monetary policy. Andy Haldane, BoE's chief economist, joined the rate hike advocacy camp. The central bank aims to reduce its bond portfolio at 1.5% (rather than 2.0% as previously suggested) and the monetary authorities are confident that the slowdown in the first quarter (a GDP growth of 0.1%) was temporary and mainly caused by weather conditions. All of this increases the chances of tightening monetary policy in August, therefore, it is positive for the sterling.

On the other hand, the changes in the pound cannot answer the question of why the EUR/USD pair is more than a percent higher than yesterday around noon. Part of the dollar weakness can be explained by the sale of the US currency against the British currency after the statement from BoE. However, this does not justify such a strong growth (in total about 150 pips from lows).

The back-room talks between Chinese and American officials on the easing of trade tension between Washington and Beijing may be one of the justifications for this. On the other hand, however, it has also been reported that almost all imports ( 500 billion USD/year ) from the Middle Kingdom can be subject to customs duties. Therefore, it can be concluded that the impact of both information is mutually supportive. Thus, there is no good explanation for the recent changes, and it is possible that the increases are just a technical response before the next downward wave.

Eurozone PMI run-of-the-mill

In the morning, the IHS Markit published data on PMI indexes for European industry and services. The collective index rose to 54.8, 0.7 percentage points above May readings. However, this is not a very serious rebound (the second weakest publication in 17 months), and in addition, it was the result of a rebound in the service sector. Manufacturing production prolonged the downward trend and reached new 18-month lows of 55 points.

Among the positive elements, there is a strong increase in employment (especially in services). The IHS Markit also suggests that GDP could grow by 0.5% in the back of the present quarter, better than in the first three months of the year (0.4% quarter-on-quarter), but much less than in 2017 when a level of 0.7% QOQ was observed.

In summary, Chris Williamson, IHS Chief Economist Markit, did not sound optimistic about the data. He wrote, among other things, that the expectations concerning future business activity are "at a very low level and production exceeds new orders, which means that production and employment may weaken again in July if demand does not accelerate". Williams also said that "industrial processing is especially sensitive to a slowdown in the coming months due to foreign trade concerns and political issues. Production sentiment has fallen to its lowest level since 2015.

Therefore, overall, looking at the economic reports from the eurozone (PMI, Italy, political turmoil, trade risks, accommodative monetary policy), the European currency is likely to remain under pressure in relation to the dollar, even taking into account its rebound from Thursday's lows.

Stronger zloty

The Polish currency benefits from a slightly better sentiment and rebound to the EUR/USD. However, external events may still have a negative impact on the zloty and recent the EUR/PLN pair decreases from around 4.33 to 4.31 may turn out to be only temporary (details in the previous paragraphs).

In the next few hours, however, there should not be any dramatic movements. In the afternoon, OPEC's and Russia's decision on the future supply of crude oil will be announced (production may increase by around 600k barrels per day). This in the long term seems to be too little to bring balance to the market, especially in the light of the expected sanctions on Iran and the problems with extraction in Venezuela. Today, however, this threat should not be crucial for emerging countries, so the zloty is unlikely to be affected either.

22 Jun 2018 13:16|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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