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Afternoon analysis 01.12.2014

1 Dec 2014 17:00|Artur Wiszniewski

The European Central Bank will have to face low oil prices. The rouble curb losses as oil drop stabilized. PMI report supported the pound. The zloty rose before the Monetary Policy Council meets on Wednesday after supportive data.

Severe oil losses are going to result in a higher global GDP growth. The drop of major energy commodity by one third of its price will help to support the efficiency of businesses and profitability. Every 10 dollar drop in the oil price results in 0.2-0.3 percentage point of additional GDP growth, according to Capital Economics.

However, the low price of oil complicates the situation for the European Central Bank. Eurostat said that inflation rose 0.3 percent in November from a year before – it was the slowest pace in five years. Given current cheap energy environment the EBC will struggle to fulfill its goal of bringing price growth to close 2 percent from today's level.

In the meantime, the Bundesbank president Jens Weidmann that one can consider the recent oil price drop as a small stimulus package. Having said that the German central bank chief will not be eager to support the introduction of full quantitative easing – the asset purchases program that includes government bonds.

Conversely, some commentators see current low oil price as a reason for the European Central Bank to introduce QE. The significance of a low oil price will be surely discussed during the EBC meeting in this week. On Thursday at a press conference after announcement of the ECB decision Mario Draghi will be asked to asses the impact of oil market developments in the view of the monetary policy. His view may help to decide whether to include oil price in analyzes concerning the QE outlook.

Today the euro rose despite poor economic data. PMI reports didn't meet expectations, what ensured investors that the ECB will have to add to stimulus. The major three euro zone economies fell short to meet expectations, with Germany as the major disappointment. In addition, Italy's final GDP reading was worse than previous estimate with economy shrinking 0.5 percent – more than 0.4 percent in the first reading.

The EUR/USD was quite stable in the recent month, despite good reasons to go down. Mario Draghi's speech after rate announcement is often a trigger of the euro plunge. Thus, if ECB president reassures investors on QE introduction in spite of Bundesbank's objections given oil prices, the common currency will probably return to losses.

The pound rose after data

On the murky picture of the EU economy the UK economy is a bright spot. Today's PMI report exceeded expectation and rose to 53.5 from 53.2. This factor supported the GBP/USD that moved away from its September 2013 low by rising to 1.5750.

In the previous week the Bank of England president Mark Carney said that interest rates hikes will be gradual and limited. However, a calming from the monetary authorities doesn't change the fact that the BoE remained on track to rise interest rates in 2015. The move will be later than previously expected, but the ECB and Bank of Japan move in an opposite direction. That will put the pound in quite good position, if data is good enough.

The rouble tamed losses

After hitting the lowest levels in history against the euro and the dollar, the Russian currency recouped some losses in the afternoon. The move was spurred by rumors that the Bank of Russia intervened in the currency market. Nevertheless, the currency will return to losses as the oil price tumbles and the economy faces increasing pressure from sanctions.

Poland PMI report was better than estimated. The index stood at 53.2, up from 51.2 in the previous month and more than 51 projected. It was a third gain in a row. The Friday's GDP report was also solid.

On Wednesday the Monetary Policy Council will announce decision on interest rates. Given the recent economic data the likelihood of cuts is very low. This situation puts the zloty in position to further extend gains.

1 Dec 2014 17:00|Artur Wiszniewski

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 acknowledgement of the source is prohibited.

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