Daily analysis 06.12.2017

06.12.2017 12:32|Marcin Lipka

Deterioration of the global sentiment made it possible for the EUR/USD to rebound from the level of 1.1800. The pound remained under pressure due to the lack of positive information about Brexit. The EUR/PLN is in the range of 4.21-4.22 after a rather dovish message from the MPC. The weaker market sentiment is also a burden for the zloty.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • 2:45 p.m.: ADP report from the US labour market (estimate: 190k).

EUR/USD supported by a weaker dollar

Initial increases in the US trading market during Tuesday's session did not last long and yesterday's quotations ended under the line yesterday. This caused drops in yields on the US Treasury bonds, and also stopped the downward movement on the EUR/USD pair which initiated an upward rebound. Events in Asia and morning quotations in Europe continued the signal sent by the New York market, which means that the EUR/USD is fluctuating between 1.1830-1.1840.

It seems that there was no concrete catalyst for the drops. Perhaps the nervousness was caused by information about plans to move the US embassy from Tel Aviv to Jerusalem or the fears of voting for an increase in the debt limit in the United States. There is also an increased risk that corporate tax cuts in the US could be introduced in 2019 (the Senate version), which would reduce the fiscal stimulus next year, as well as the probability of a faster than the consensus increase in interest rates.

ISM index for the US services sector (57.4 points vs. 59 points) appeared to be weaker than the consensus. The business activity component remained above 60 points, but new orders fell by more than 4 points to 58.7 level, and employment fell to 55.3 points from 57.5 points. It is worth noting that the previous reading was at 12-year highs. Usually it is difficult to maintain such high levels for a long period of time because a continuous and marked improvement of the situation of very strong readings would have to be dealt with. The direct response to ISM was rather limited and the influence of other factors possibly caused investors to remember that the index for November hasn’t been as good as it was recently.

Pound still has problems

The sterling is still responding to Monday's event where an agreement between the UK and EU on Brexit issues was not reached. From the reports presented by Bloomberg today, it is possible that May's cabinet could tend to keep UK regulation at a level similar to the EU (not only in Northern Ireland). This would not only prevent a "hard border" between Northern Ireland and the Republic of Ireland, but between Northern Ireland and the continental part of the United Kingdom as well.

This idea contradicts the overall approach of the separation of Great Britain from the EU. There is no progress in relations between the Northern Ireland Democratic Unionist Party (DUP - coalition member of Prime Minister May's government) either. Despite the plans, BBC articles quoted by Bloomberg report that the telephone conversation between the presidents of both parties that was scheduled on Tuesday didn’t take place.

The political situation on the Islands does not help the negotiations. The latest survey (Survation) showed that labourists have as much as an 8% advantage over conservatives (in the Labour Party elections, 2.5% missing to the Tory.) For the eleven studies that were published in November, conservatives gained an advantage in only one. The average advantage of labourists varied between 2-3 percentage points. The risk of further early elections in the UK does not improve the pound's situation. Therefore, the next few days will be significant for the GBP. If there is no breakthrough in the negotiations on the Irish issue before next week's EU summit, the pressure on the pound could increase significantly.

Weaker zloty

Yesterday's MPC statement had few hawkish elements (only the broader discussion of inflation reaching the 2.5% target was in the message). The press conference was clearly dovish. Statements by President Glapiński, Professor Łon and Professor Sury showed that the mild part of the MPC’s higher inflation is not a surprise and they believe that interest rates should remain unchanged until the end of 2018.

The initial impact of Council reports on the zloty was limited, however, due to the core scenario maintaining a rather mild attitude. However, connecting this with an increase in risk aversion (session in the US, falls on European markets) caused the EUR/PLN quotations to move from 4.20-4.21 to 4.21-4.22.

In the following hours, there are no key macro publications (apart from ADP data) so once again, much will depend on the sentiment across the ocean. Declines on the US market maintaining connected with the relatively high yields on US Treasury bonds is a negative signal for the zloty, which may extend the weakness of the Polish currency during the afternoon trading as well.

 


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