Afternoon analysis 14.12.2017

14.12.2017 15:44|Bartosz Grejner

The ECB increased economic growth and inflation projections making the euro quite volatile today. The Bank of England has left interest rates unchanged as expected, but it projects lower GDP growth in Q4. Zloty quotations were relatively stable. Better prospects for the eurozone economy may help the Polish currency in 2018.

Eurozone will grow at a faster pace

The Central Bank (ECB) has left interest rates unchanged as expected. Moreover, the 30 billion EUR per month asset purchase program is expected to last until the end of September 2018, and, if necessary, even longer, until the ECB decides that a permanent adjustment of the inflationary path is in line with the inflation target.

Around the time of the statement’s publication, an increased activity on the currency market was observed, but ultimately the changes were limited. A sharp drop in the dollar today, as yesterday, was not seen, but the FOMC dovish message is likely to continue to put pressure on the dollar in the following days.

Regarding the following hours, better than expected data from the US economy may help the dollar somewhat. Initial jobless claims last week amounted to 225k, 14k below market consensus and only 2k more than the 44-year low from October. Moreover, retail sales data also turned out to be clearly above expectations: in November, it rose by 0.8% per month against an expectation of 0.3%. October's sales growth was also revised upward from 0.2% to 0.5%.

During a press conference, which began at 2.30 p.m., Mario Draghi (President of the ECB) presented upward revised GDP growth pace forecasts for the eurozone, which are intended to reflect the improving condition of the eurozone's economy. This year it is expected to grow at a 2.4% pace, in the next year it is expected to increase by 2.3%, in 2019 by 1.9% and in 2020 by 1.7% (new projection). Based on the ECB's September estimates, these values are higher by 0.2; 0.5 and 0.2 percentage points respectively.

Inflation expectations in 2018 compared to September projections have also been raised significantly, and now it is expected to amount to 1.4% per year, by 0.2 percentage point YOY more than before. However, a slightly higher level of energy prices will most probably be due to higher energy raw material prices.

However, the market will probably have to wait until a gradual increase in core inflation (excluding energy and food prices) to see a significant euro increase.

Dovish Bank of England

Despite the fact that changes in interest rates were not expected or in the bond purchase program, the statement after the monetary committee meeting, which was published by the Bank of England at 1.00 p.m., turned out to be relatively dovish. In the statement, we can find that the economic growth pace in Q4 of this year may be slightly slower than in Q3 due to weak data from the British economy.

Consumer Inflation (CPI), which reached 3.1% per year in November, according to the committee members, is expected to return to the target level of 2% (inflationary) by the end of the three-year projection period. In addition, the perspective for the UK economy is currently dependent on the Brexit process.

Today's market events, in particular, the ECB's statement and press conference, only had limited impact on zloty quotations. However, the perspective for a faster economic growth pace than earlier forecasts may be a good for the Polish currency. The good condition of the eurozone's economy, as well as the whole eurozone, may mean that demand for emerging currencies will continue to be relatively high in the coming years, which can also be favourable for the zloty.

Weaker zloty

As a result of the Bank of England's publication, the pound slightly depreciated in relation to the main currencies. The changes, however, were not significant and were within the fluctuation range that was observed during today's quotations. On the other hand, the global zloty condition, which has been slightly weaker today, has caused the pound's valuation to rise again today to approx. 4.80 PLN.

Tomorrow's preview

After this week which was rich in data and meetings of the world's largest central banks, the calendar of scheduled events for Friday is not as intense as in the previous days. Therefore, fluctuations in the currency market will probably be limited. The publication, which may affect dollar quotations, will include November's data on industrial production in the USA. This data will be presented by the Federal Reserve at 3.15 p.m. (CET).

The activity of this sector was surprisingly good in the previous two months. In October, production grew by 0.9% per month, although the pace was expected to be almost half (0.5%). However, its main component, i.e. the manufacturing production, has attracted particular attention, where the increase in production by 1.3% MOM was the highest in three years (expected at 0.6%).

The market consensus indicates a further increase in production by 0.3% per month in both cases. However, if, for the third time in a row, the data exceeds economist expectations, the dollar could have gained in value. However, its growth potential appears to be relatively limited, mainly due to the relatively dovish message from the US Federal Reserve Monetary Committee (FOMC), which was published on Wednesday.


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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 the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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