Tariffs and ECB (Afternoon analysis 11.07.2018)

Tariffs on imports from China worth 200 billion USD to the US worsen the market sentiment, but their impact on the currency market has been limited so far. The zloty remains stable.

Is ECB divided?

After the US administration announced a list of Chinese imports worth 200 billion USD on which a 10% duty could be imposed, market sentiment deteriorated. The main market indexes in Asia and Europe have lost even more than 1%, but they are not the decreases that could have been expected if the market had valued the escalation of customs wars as almost certain.

A suppressed reaction was also observed in the euro against the dollar listings. The EUR/USD exchange rate fell to around 1.17 (yesterday evening: 1.175), but it was within the fluctuation range of recent days. This also contributed to very limited changes in the zloty, which in relation to the main currencies was at the closing levels recorded on Tuesday.

The EUR/USD volatility slightly increased in the afternoon when Reuters reported that the ECB's interest rate members were divided on the timing of the eurozone interest rate increase. The division also concerned the phrase in the statement that interest rates would remain unchanged 'at least for years'. This resulted in a sharp increase in the exchange rate from 1.17 to approx. 1.175, but it was also within the range of today's quotations.

The impact of this information on the euro should be rather limited. Especially as the Bureau of Labour Statistics in the USA (BLS) published better than expected June's data on producer inflation (PPI). This is rather secondary reading in terms of the impact on the US currency, but it may support the dollar somewhat before tomorrow's relatively more important publication of the consumer inflation index (CPI). The PPI core reading (excluding energy and food prices) increased by 0.4 percentage points year-on-year to 2.8%, although the market consensus assumed a 0.2 percentage point slower growth. It is also the biggest year-on-year increase in 7 years.

Until tomorrow's publication of consumer inflation data in the US, market sentiment will be driven by potential trade reports. If measures against US imports by the government in Beijing were specified, there could be a significant deterioration in sentiment and a depreciation on the US markets. Such a scenario would also be negative for the zloty, which could be under supply pressure.

Tomorrow's preview

Thursday's calendar of scheduled events is relatively rich. At 11.00 a.m., Eurostat will publish May's data on industrial production for the eurozone. The previous four months were somewhat disappointing in terms of production. In April, an annual growth rate of 1.7% was recorded, and the market consensus for May indicates an increase in the sector's growth rate to 2.1%. If this data once again turns out to be lower than market expectations, combined with the intensification of customs wars and the weakest ZEW index in 6 years for the single currency region (published yesterday), the data could exert additional pressure on the euro and worsen market sentiment. As a result, this may also weaken the entire zloty's basket.

Two and a half hours later, the European Central Bank (ECB) will present minutes from July's Governing Council meeting. If it turned out that the discussion on leaving interest rates unchanged until the end of summer 2019 was less clear than it would appear from the statement, the euro could be supported. It seems, that the probability of more significant changes in the single currency valuation is limited, and the issues of international trade and new duties, which may be imposed on goods imported by the USA from China, may cause more serious changes (the escalation of the conflict may ultimately harm the euro).

The Bureau of Economic Analysis (BEA) will publish June's data on consumer inflation (CPI) in the US at 2.30 pm. The most important will be the data regarding the core index (excluding energy and food prices). The market consensus points to an increase in the core CPI by 0.1 percentage points to 2.3% year-on-year. A higher than expected reading would increase the chances for rapid monetary tightening in the US and it could strengthen the dollar. At the same time, this would be bad news for the zloty, which, sensitive to rapid changes in the dollar, could depreciate together with other currencies of emerging countries.