The US dollar stays firm as China stocks tumble (Daily analysis 26.07.2021)

26 Jul 2021 10:50|Bartosz Sawicki

The week opens with a few percent plunge in Chinese stock markets triggered by planned drastic changes to the operating rules of private education companies.

The flight from risk is hurting procyclical currencies and representatives of the emerging markets basket. The US dollar continues to trade firm; the EUR/USD pair remains glued to the 1.18 area. Defensive currencies that are the Swiss Franc and the Japanese yen lead the pack in July as the yields on US Treasuries have dropped sharply.

Fed meeting as a main risk factor for the dollar

This will be an extremely important week for emerging economies. In Poland, the inflation reading will be the highlight of the week. In June, consumer price growth slowed down to 4.4% year-on-year, but a further pick-up is expected in July. However, the CPI growth should not exceed the May high of 4.7% year-on-year (although its levelling out is quite possible). In the CEE3 region, the meeting of the Hungarian central bank, which should bring an increase in interest rates, and the preliminary reading of the Czech Republic's GDP for Q2 are also worth noting. In the coming days, we will also get data on national accounts from the United States, Germany and the eurozone. There are also a number of economic barometers scheduled, including the German Ifo index on Monday.

However, the Wednesday Federal Reserve meeting will be the highlight of the week. While no new forecasts will be released, investors will closely look for clues as to when to start cutting off the emergency stimulus in the form of asset purchases conducted at the rate of 120 billion USD per month. Employment is still 6 million lower than before the pandemic, but inflation in June hit an all-time high. Recently, there has also been a lot of concern about the fading economic climate. This combination creates a lot of uncertainty about the Federal Reserve's next steps. We expect that the mantra that price pressures are temporary and the labour market is far from in a condition to begin normalisation will be repeated. As a result, the dollar, which has been very strong recently, may be at risk of a correction.

26 Jul 2021 10:50|Bartosz Sawicki

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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