January's PCE inflation in the US was in line with expectations, however, last week's number of initial jobless claims has been the lowest since 1969. The worse sentiment in the market supported the dollar. Therefore, the dollar's exchange rate rose in relation to both the euro and the zloty to the highest level since mid-January.
Sentiment deterioration is beneficial for the dollar
Yesterday's main US market indexes depreciation (and related to it a deterioration of market sentiment) had a negative impact on today's trading. The increase in risk aversion, connected with fears about the Federal Reserve's' President speech (at 4.00 p.m.) in the US Congress caused a clear depreciation of the share market and at the same time appreciated the dollar.
The main currency pair's quotations (the EUR/USD pair) fell to its lowest level since mid-January. One euro cost 1.216 USD. The globally stronger dollar's condition translated into an increase in the USD/PLN exchange rate reaching to 3.44 PLN level (being at the same time the highest dollar's price expressed in zloty since one and a half months).
Moreover, the entire zloty's basket depreciated but the biggest reaction was seen on the dollar. This pair will be the subject to fluctuations in the following hours. Much depends on the dollar's quotation and the share market's later in the day. The dollar's appreciation may exert more pressure on the Polish currency.
The long-awaited by investors publication of PCE inflation was in line with expectations. The core inflation (excluding energy and food prices) amounted to 1.5% year-on-year in January. However, weekly data on initial jobless claims was a positive surprise. The market consensus indicated a slight increase to 226k (from 222k), and the data from the US Department of Labor showed a decrease to 210k (the lowest number since the end of 1969).
The dollar lost some gains after the publication of data on inflation and jobless claims - the EUR/USD exchange rate rebounded and moved from 1.126 to about 1.129 today. To see the final market's reaction one must wait until the evening when the US investors will be more active and Jerome Powell's speech will begin. Therefore, in the afternoon, some significant fluctuations in the market may be observed. If an improvement in market sentiment is observed and the main market's indexes gain, the zloty may pare some of the losses. In such a scenario, the euro's price may fall below 4.18 PLN, and the dollar may fall to around 3.42 PLN.
At 8.00 a.m., Destatis will publish January's retail data in Germany. After an unexpected fall in December to 1.9% year-on-year (expected growth of 2.9%), the median of market expectations indicates a strong rebound and an increase in sales of 3.5% year-on-year and 0.9% month-on-month. This data is a good measure of consumption in the economy and if the data strongly differs from consensus (+/-2 percentage points), it may affect the market's quotations and the sentiment on a broad market. However, its impact seems to be limited due to recent market reactions to Powell's statements or current US inflation data.
Around 10.30 a.m., February's data on the PMI for the UK construction production will be published. Since about three years a downward trend has been observed in activity growth in this sector. In the short term, the PMI has been declining over the last two months, at the same time failing to meet the market expectations. In January, it amounted to 50.2 percentage points, i.e. just over the boundary (50 percentage points) separating the increase of activity growth in the sector from its decline. The market consensus indicates a slight increase to 50.5 points, but data with less than 50 points could cause significant pressure on the pound.
In the case of the pound, the market's attention may be focused on the expected appearance of Theresa May scheduled for tomorrow. The rejection of Brexit's proposal from the EU and the weakening internal position of the UK Prime Minister elevate uncertainty about the final shape of trading conditions after the Brexit. Therefore, significant fluctuations in the pound's valuation around May's speech may be observed.