Slightly better sentiment (Daily analysis 29.06.2018)

The sentiment improvement on the market weakened the dollar and helped the zloty to pare a small part of the losses. However, the market's attention may be focused on the afternoon inflation data of the US.

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

• 2:30 p.m.: PCE core inflation in the US in May (estimates: 1.9% year-on-year, 0.2% month-on-month).

EUR/USD still above 1.16

Yesterday's US session ended slightly more positively, which also translated into significant increases in the main market indexes in Asia. The dollar weakened, with euro/dollar (EUR/USD) quotations rising to around 1.167 this morning, although they were still close to 1.15 level of yesterday. The economic growth rate in the Q1 was 2.0% per year, compared to earlier estimates and expectations of 2.2%.

The second possible catalyst for the euro appreciation was the EU leaders' agreement on migrants rescued at sea. The agreement stated that rescued migrants on EU territory should be sent to "controlled centres" within the Union. An important compromise for some Central and Eastern European countries (which were opposed to the EU authorities imposing a number of refugees in advance) was that the agreement is voluntary.

The observed improvement in sentiment (European markets also started the day with a clear increase) may, however, be partly only a reaction to the recent decline. The increase is also still small and taking into account the continuing high level of uncertainty about increasing restrictions on international trade (additional duties), significant market fluctuations can be expected.

The currency market has a somewhat weaker reaction than, for example, the stock market, probably because it is not entirely clear which duties could be imposed and by whom. However, whatever happens, it is likely that the dollar will strengthen in the long term.

Shortly before 10.00 a.m., the main currency pair (i.e. EUR/USD) traded above 1.16 a.m. However, it may lose a little in the following hours due to data from Germany, which provides another argument for cooling down the economic growth rate of Europe's largest economy. Retail sales in May dropped by 1.6% compared to May last year, although it was expected to grow by 1.8%. It was the biggest decrease since February last year, and April's increase by 0.2 percentage points to 1.0% was also revised downwards.

In the long-term, the ongoing uncertainty about tariffs, the weakening of the growth rate in the eurozone and the dollar's strengthening will harm the Polish currency. Today, the zloty was strengthened by today's recovery. However, these are still relatively high levels, close to the recent the dollar or the euro highs. The EUR/PLN pair was around 4.36 this morning and the USD/PLN pair around 3.75 this morning.

However, the morning sentiment improvement could have a short-term impact if the PCE inflation reading in the US exceeded market expectations. The probable strengthening of the dollar and decreases in the stock market could cause supply pressure on the zloty.