Afternoon analysis 07.12.2017

Zloty's quotations with only minor changes, but national political events may increase its volatility. The market is waiting for tomorrow's report of the US Department of Labor - therefore, the probability of significant changes is still limited today.

Stable zloty, but there is a possible increase in fluctuations

The zloty's quotations were relatively stable during today's session. The zloty in relation to the main currencies was at the same level as at the end of the previous day. In the following hours the calendar of scheduled publication is practically empty, therefore theoretically the probability of significant changes on the zloty is limited. Apparently, political events in Poland may significantly increase the currency's volatility. In addition, the Brexit issue is still relevant and the information coming to light about coming to an agreement or not may increase the GBP/PLN fluctuations.

Friday may also be an important day for the zloty. Tomorrow, we will probably see the most important publication of this week, November's report on the labour market in the US. If it caused a significant appreciation of the US currency combined with an increase in yields on the US Treasury bond, the zloty, along with other emerging currencies, could clearly depreciate. The dovish attitude of the majority of the MPC members, who do not expect interest rates to rise before the end of 2018, no longer supports the zloty.

Minor changes on EUR/USD

The euro and the dollar quotations were close to yesterday's levels. The EUR/USD pair was still around 1.18. In the eurozone we could observe quite mixed data - in Q3, the eurozone's growth pace was by 0.1 percentage points higher than it was in previous data. On the other hand, the German industry recorded a second month of drops (in monthly terms). As far as the dollar is concerned, today's Labor Department data showed that the number of initial jobless claims submitted last week amounted to 236k and was lower by 4k from expectations as well as by 2k from those of the previous week.

However, this data is rather secondary in terms of their impact on the dollar. A significant decrease (about 44-year lows) would be needed to have a noticeable response to the dollar. At the moment, most market participants are probably expecting a report on the labour market tomorrow. This fact will rather limit significant changes in the both currencies' valuation, especially as no important macroeconomic data will be known in the following hours.

Tomorrow's preview

At 10.30 a.m., the Office for National Statistics (ONS) will publish October's data on industrial production in the British economy. Since June, its growth pace has been gradually increasing, in May it amounted to -0.2% per year, while in September it was already 2.5%. The median of market expectations indicates a further pace increase to 3.9%; a similar reading is expected for the main component of production, i.e. manufacturing production.

The strong increase in October may be have been caused by a low base in the previous year when production decreased by 0.9% per year. Together with the industrial production data, data from the construction sector will be published. Unlike the industrial sector, activity among British construction companies last year increased last October (by 0.7% on an annual basis) and market expectations indicate that it increased by 1.9% in October (in September it grew at a pace of 1.1%).

ONS will publish October's data on the UK trade balance at the same time. A month earlier, the deficit was 11.25 billion GBP and turned out to be the lowest since March. The market consensus indicates a slight increase to 11.45 billion GBP in October.

Taking into account recent significant fluctuations on the pound, the publication of the aforementioned data may further increase the nervousness of its quotations. The number one topic, which also has the biggest impact on the British currency valuation at the moment, is the Brexit negotiations (with Ireland and the EU). However, if the above data were to deviate significantly from the consensus, especially in the case of industrial production, greater volatility in the pound could be observed.

Four hours later, the US Department of Labor will publish the November report on the labour market. Data like, employment in the private sector, unemployment rate and wage developments will be published. The attention of market participants can be focused on the latter.

Wages growth may put pressure on inflation, which, in the context of the current increased uncertainty around rate hikes in the US in 2018, may make that the dollar will particularly vulnerable. The median of market expectations indicates an increase in the average hourly wage by 0.3% compared to the previous month (and 2.7% per year).

A reading higher than indicated could suggest more pressure on inflation, slightly increasing the probability of rate hikes in 2018, which in turn would probably strengthen the dollar. The market's attention to this data may be drawn to it due to the fact that it has clearly been out of line with expectations in the previous two months. In September it increased by 0.5% per month, while in October the data remained stable (it was expected to increase by 0.2%).

Currently, the inflation in the US shows no upward trend. The reasons for this state of affairs are not identified, which makes it even more difficult to assess the future level of interest rates. In situation of November wages data also failing, the dollar could clearly decrease and give up the profits generated in the recent days.