Volatile fundamentals for a better sentiment? (Afternoon analysis 22.06.2018)

Although there has been an improvement in market sentiment, it may be fragile, especially in the case of the euro. In particular, "soft" data (PMI) indicates that industrial growth is still relatively weak.

EUR/USD close to 1.17

After several sessions of price drops in the market and appreciation of the dollar in the currency market, today we observed a rebound on both markets. Both the main European indexes and the futures contracts for their US counterparts clearly gained in value (although they are still at relatively low levels in comparison to the quotations of a week ago).

The EUR/USD quotations rose to about 1.168 EUR today, while yesterday they tested the 1.15 boundary. Hard data, except for speculation on trade (the US is allegedly using behind-the-scenes talks to settle its dispute with China), which could support so strongly the euro was not present.

The aggregate PMI index for the eurozone turned out to be better than expected (54.8 pts. vs. expectations 53.9 pts.) but it owed it mainly to the services sector - the industrial sector continued to grow at a relatively slow pace (the slowest pace in 19 months). Therefore, the current response is more likely to be a technical one than a fundamental one, which should support the argument of a further, gradual appreciation of the dollar.

Today's improvement in market sentiment has also helped the zloty to pare some losses. Although the basis for this reaction is volatile, the Polish currency has been appreciating in relation to the basic currencies. The euro fell from 4.33 PLN to approx. 4.31 PLN, and the dollar by 0.07 PLN from its high of 3.76 PLN around 3:00 p.m. There are no publications or events in the following hours that could have a significant impact on the zloty's quotation. On the other hand, it is important to remember what is the basis of today's rebound (the EUR/USD pair growth). If EUR/USD falls were to return in the evening, when the US investors would be more active, it could lead to a decrease in the zloty.

Next week's preview

For the foreign exchange market, the most important day of next week may be Friday. Before noon, preliminary data on consumer inflation (CPI) both in Poland and in the eurozone in June will be published. The median of expectations in both regions indicates an increase in the headline inflation rate to 2.0% per year. However, the most important of these readings will be the eurozone's core reading (excluding relatively volatile factors such as energy, food, alcohol and tobacco prices).

It is expected to decrease from 1.1% to 1.0% per year. However, if the decline were to be greater, both the euro and the zloty could be under supply pressure. This would limit the already reduced chances for an increase in interest rates next year in the eurozone (following the last ECB meeting, the ECB stated that this would not happen before the end of the next summer).

This pressure could be even greater if the afternoon PCE inflation data in the USA exceeded expectations for May (core index at 1.8% year-on-year). This is, of course, a negative scenario for the euro, and a positive one for the dollar, but it would be helpful to reflect the current differences in both the approach of the central banks of the two regions and the economic situation. The US is currently experiencing an economic recovery, inflation is gradually rising and the median of expectations for a faster monetary tightening has recently increased (from 3 to 4 rate hikes this year), while the opposite is happening in the eurozone, where economic growth has slowed down somewhat in recent months.