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US industry the strongest in six months (Afternoon analysis 3.02.2020)

3 Feb 2020 17:06|Bartosz Grejner

Positive January data of ISM from the US industrial sector support global sentiment as well as the dollar. The pound depreciates, and the GBP/USD rate dropped to 1.30 in the afternoon. A year of strong volatility is most likely ahead of the British currency.

The EUR/USD exchange rate moves away from 1.11

The sharp deterioration in sentiment in Asia and about 8% drops in the main Chinese indexes had a minimal impact on the quotations in Europe or the USA. Half an hour after the trading on the New York Stock Exchange began, and the main indexes overseas increased by just over 1 percent, paring a large part of the losses that occurred after the virus outbreak in China came to light. This was the result of data from the US industry that far exceeded expectations, allowing the market to forget about the threat of the epidemic at least for a moment.

The January PMI activity index for the US industry published by ISM was the highest in six months, rising to 50.9 points, well above the expected 48.5 points and 47.8 points in December. Sub-indexes of new orders and production increased particularly strongly. The PMI data are survey data and may change strongly influenced by market sentiment. Nevertheless, this is another signal from the US economy that it is in very good shape, and the imbalance in relation to the eurozone may be slightly greater than previously expected.

Although the dollar has already experienced a gradual appreciation during the day, the demand pressure on the US currency may increase slightly. On Friday, the dollar was depreciating due to falls in US Treasury bond yields. Today, some of this movement was reversed. The EUR/USD fell from about 1.1090 to 1.1036 just after the publication of PMI data. The dollar index by Bloomberg, which covers not only the major emerging currencies, reversed the entire Friday's fall in the afternoon, rising to around 1.1199.

The globally stronger dollar led to an increase in the USD/PLN exchange rate again just above 3.89, although the fluctuation range in recent days remains limited, as was the case with the EUR/PLN pair moving around 4.30. Further strong declines were recorded in the GBP/PLN exchange rate, which in the afternoon moved to the 5.06 level. This is supported by global supply pressure on the pound. The GBP/USD exchange rate was again close to 1.30. Strong fluctuations of the pound (on Friday was observed the rate of 1.32), apart from the stronger global dollar, are somewhat a reminder of last year's history when, among other things, negotiations on Brexit and voting in the British Parliament caused significant changes in the rate. The UK's trade agreement with the European Union expires at the end of this year. Negotiations on this issue are unlikely to be without confrontational rhetoric, which could adversely affect the exchange rate of the British currency. The better condition of the dollar (globally increased uncertainty is conducive to this) with recent slightly weaker data from the Polish economy should maintain the weaker condition of the Polish currency. It is currently protected from further depreciation by good sentiment in the global market, but this may change with the development of the Chinese virus.

Tomorrow's preview

The calendar of key macroeconomic events scheduled for tomorrow is limited. At 4:00 p.m. the Census Bureau will publish data on machinery orders in the USA in December. This may be a good indication of future industrial production, so strong deviations from the consensus may increase dollar fluctuations. The median of market expectations indicates an increase of 1.2% on a monthly basis. The potential change in the dollar value due to these data will be rather limited. The most important publication planned this week will be Friday's report on the US labour market.

3 Feb 2020 17:06|Bartosz Grejner

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.

See also:

3 Feb 2020 14:55

Better data from the eurozone, worse from Poland (Daily analysis 3.02.2020)

31 Jan 2020 12:37

Very weak data from the euro area (Daily analysis 31.01.2020)

30 Jan 2020 14:51

Interest rates in the Islands unchanged, the pound appreciates (Daily analysis 30.01.2020)

23 Jan 2020 12:07

Virus from China depreciates the Polish currency (Daily analysis 23.01.2020)

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