Stronger dollar (Daily analysis 18.07.2018)

The US currency continues its upward trend after the speech of the Federal Reserve Head (Fed). The zloty is supported by data from the Polish economy: higher pace of industrial production and producer inflation. The next day of the Head of the Fed's speech to Congress may provide increased volatility.

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

• 4:00 p.m.: Jerome Powell's speech to Congress.

EUR/USD close to 1.16

Since yesterday's midday, the dollar has been steadily strengthening. This is not a surprise, as the foundations (including rising interest rates and rapid GDP growth) support the US currency, especially if compared to the situation in the eurozone. However, yesterday evening, the dollar received another positive impulse from the Head of the Federal Reserve, Jerome Powell.

Powell confirmed the plan to raise interest rates at the expected pace and positively assessed the US economy, in particular, the labour market. As a result, both the share market and the US dollar are appreciating. The EUR/USD fell to around 1.161 this morning, while the dollar index (DXY), which measures the strength in relation to the six main currencies, rose to around 95 points - this is the upper limit of last year's quotations. The yields of US Treasury bonds also increased, which also boosted demand for the US currency. The yields on bonds maturing in three months increased above 2% for the first time since 2008.

An upward trend in the dollar usually causes a downward trend in the zloty. This time, however, the zloty is stable due to a positive sentiment on the share market (the main indexes are increasing on European and Asian markets). Support is also provided by data from the Polish economy.

Yesterday, the Polish Central Statistical Office (GUS) presented data on the average wage increase in June that was better than expected. Today, GUS published June's data on industrial production and producer inflation (PPI). In both cases, the data turned out to be above in green. Production increased by 6.8% year-on-year (consensus: 6.1%), and the PPI index was 3.7% (consensus: 3.6%). In the case of producer inflation, in June it was also revised upward from 2.8% to 3.0%.

However, the macroeconomic data will not support the pound. Today's publication of inflation data by the Office for National Statistics (ONS) clearly failed to meet expectations. The headline inflation index in June in the UK remained at 2.4% per year, although it was expected to reach 2.6%. On the other hand, much more significant core inflation (excluding energy and food prices) fell to 1.9%, 0.2 percentage point below the market consensus. This is also the lowest level in 13 months and may significantly reduce the probability of rate hikes by the Bank of England.

Therefore, the pound's quotations fell after this information. The exchange rate in relation to the dollar dropped to the 1.30 boundary. The last time this level was observed at the beginning of September last year, although it is partly the result of the dollar strengthening. On the other hand, compared to the zloty, the pound fell below 4.82 PLN, to the lower limit since May this year.

Yesterday's dollar response showed that Jerome Powell's second day in Congress (4:00 p.m.) could be a significant event. Higher dollar volatility is likely to occur, although the underlying trend is expected to continue. However, this is not positive news for the zloty, which, despite support from the macro data, is likely to weaken.