Afternoon analysis 01.10.2014

The dollar was supported by better than estimated labor market data. The euro extended losses as rumors that ECB would wide an eligibility of ABS arose. The USD/JPY above 110. Improvement of the Polish PMI didn't change MPC view.

Better than estimated US labor market data supported the dollar. ADP employment change report showed 213k increase in employment. It was better than 200 estimated according to Bloomberg consensus. In the previous month employment rose 202k (after revision from 204k).

The ADP report precedes key data from Commerce Department on employment situation due on Friday. In September non farm employment rose 215k according to Bloomberg survey. The unemployment rate stood at 6.1 percent according to survey.

Improvement of US labor market pushed the dollar higher due to rising bets that the Federal Reserve will rise rates in the first half of 2015. Earlier, the USD/JPY rose above 110 for the first time since 2008 on the morning. But later it dropped.

ECB may soften eligibility

Tomorrow the European Central Bank will make a decision concerning the interest rates. The ECB is expected to maintain its current policy. But Mario Draghi is to provide details on asset backed securities purchases. Investors speculate that ECB may soften eligibility of ABS to provide more support for peripheral banking systems.

The EUR/USD remained its lowest since September 2012. If the ECB tomorrow dilutes eligibility rules, it will push the euro lower.

The dollar was weakened after poor ISM report. The gauge of manufacturing activity fell to 56.6 from 59 in the previous month, lower than 58.6 expected. In addition, construction spending dropped 0.8 percent. It was below 0.5 percent growth expected.

Recent data won't change plans of the Federal Reserve. But may spark some short term profit taking after moves in the last few days.

The British slippage

The British Purchasing Managers Index unexpectedly dropped. The gauge of manufacturing activity fell to 51.6 form 52.2 in the previous month (after revision from 52.5). It was below 52.6 projected.

As a result, the pound dropped against the dollar for a six day. It the longest losing streak since June. The move is determined by the fact, that the US economy is expanding, whereas the British is loosing steam. It may result in postponing interest rates hikes in the UK.

The zloty follows major trends

The zloty dropped against the dollar and the pound. It rose against the euro and the frank. The PMI report didn't change the view before the Monetary Policy Council decides on rates in the next week. Bloomberg informed that the European Union won't drop sanctions imposed on Russia until pro-Russian separatists violates the Minsk agreement. But this information didn't result in risk aversion increase, what could hurt the zloty.