Afternoon analysis 05.12.2016

The activity of the British services sector increased to its ten-month maximum. The zloty continues to wear-off against the euro, and the EUR/PLN is currently above 4.50.

Positive data from the British economy

Today, IHS Markit and CIPS published a report showing that the British PMI for the services sector reached the level of 55.2 for November. This is its best result since January. Let’s keep in mind that in July this index was at the level of 47.4, which was its worst result in more than seven years. Since then, the activity of the services sector has been increasing. This emphasizes the resistance of the British economy.

This increase was supported by the growth of new workplaces. This was caused by an increase in existing contracts, among others. Moreover, the growth of new workplaces was at its highest level since April. However, this pace was still lower in comparison to 2014 and 2015.

The sentiment of the long-term business perspective for the British economy decreased for the first time since June. This may be related with the political uncertainty regarding Brexit and inflation pressure. The majority of companies have suffered from the weak pound, because it has continued to increase production costs. Moreover, the costs of food and fuel import increased as well. Today, the pound was stable against the dollar and remained at the level of 1.27. This was mainly because of a globally weaker dollar.

Zloty loses against euro

The zloty worked-off its losses against the majority of currencies, which were caused by the Italian referendum. For example, the dollar became cheaper by 0.07 PLN at 4.00 PM in comparison to its price at approximately midnight. However, the euro has showed its strength. The EUR/USD increased to the level of 1.074, which is its highest level in more than two weeks.

The strong euro is negative for the zloty. The EUR/PLN went above 4.50, which is its highest level since June 23rd. Even though the zloty worked-off a portion of its losses from this morning, it remains weak against the forint (PLN/HUF is below the level of 70.)

The American ISM for services sector was published shortly before this analysis. This index increased to the level of 57.2 (vs 55.4). This appears to be its highest level in eleven months. Moreover, profitability of the American treasury bonds increased significantly. Thus, the zloty’s chances for working-off its losses may become limited.

Tomorrow’s events

At 8.00 AM, The Federal Ministry of Economy and Energy will publish will publish the data regarding industrial orders in the German economy for October. This data in the Month over Month interpretation has been showing a relatively large volatility. Taking into consideration that investors anticipate the decision from the European Central Bank on Thursday (regarding interest rates and the QE operation), this data will have a limited impact on the euro. Industrial orders have unexpectedly declined by 0.6% MoM in September (a 0.3% increase was expected). This was its first MoM decline since June. The market expects that this index has increased by 0.6% in October. A relatively positive reading could strengthen the euro.

At 11.00 AM, Eurostat will publish the data regarding economic growth in the euro zone for the third quarter. The market doesn’t expect any changes in comparison to its previous reading (positive 0.3% QoQ and 1.6% YoY). However, the market anticipates a decision from the ECB. Therefore, if the data is inconsistent with the consensus, it may only cause a slight increase in the euro’s fluctuations. On the other hand, if the data is near the consensus, investors will probably ignore it.

At 2.30 PM, the American Bureau of Labor Statistics will publish the data regarding trade balance for October, as well as the index of the productivity in the non-agricultural sector and the unit labor costs for the third quarter. The market expectations show that only the productivity of the non-agricultural sector may appear better than the previous reading (3.3% QoQ vs 3.1% QoQ). On the other hand, an increase in unit labor costs in QoQ interpretation is expected to remain at the level of 0.3% (a 3.9% increase in the second quarter).

The market also expects the American trade balance to reach the level of negative 41.8 billion dollars, which is approximately 5 billion lower than it was previously. In September, it was at the level of negative 36.44 billion dollars, which was better than the consensus, as well as its highest value since March. If the market expectations are correct, the reading for October would be the worst since June (negative 44.66 billion dollars). This data will probably have a minor impact on the dollar. However, if it’s significantly inconsistent with the consensus, this could increase the volatility of the American currency. Recently, the dollar index went down to approximately 101.5. This was mainly because of the EUR/USD, which is above the level of 1.07 today. If the data is slightly better than expected, this may strengthen the dollar against the euro.