Afternoon analysis 02.10.2017

The strong dollar and events in Catalonia have weakened the euro today, although the market's attention may move towards the ECB’s last meeting minutes to be published on Thursday. The zloty was stable after midday - its further course is probably dependent on the dollar's behaviour of the dollar.

Slight changes on the dollar and the euro

During today's session, the events in Catalonia (referendum, planned declaration of independence) had the greatest impact on the euro's quotations. It is likely that the reports from this region will have a negative impact on the single currency at least until Thursday when records (so-called "minutes") from the last meeting of the monetary committee of the European Central Bank are published.

Investors’ attention may move on to this event, considering the possibility of winding down the bond-buying program at the beginning of next year. On the occasion of the previous publication of minutes, the exchange rate was mentioned as an element of uncertainty. A high euro valuation could hamper inflation in returning to the inflation target.

Since the last meeting of the Governing Council, the euro or dollar's exchange rate has moved away from a 1.20 level, therefore, the impact of this publication may be ultimately limited. Especially due to the fact that, since then we have received a hawkish statement from the Fed, which despite some worse than expected readings, seems to maintain the previously stated path of monetary tightening. Therefore, strong euros' strengthening and again breaching by the EUR/USD pair above 1.20 seems to be unlikely.

During today's session, quotations of the aforementioned pair reached 1.173 around midday (approx. 0.6% lower than on Friday). In the following hours, however, the EUR/USD exchange rate moved away from its lows to approx. 1.176. The chances of significant price fluctuations in subsequent hours are limited, although the publication of the ISM Index for the US industry may slightly increase the dollar's fluctuation in the case of deviations from the consensus (estimates: 58 points, previously: 58.8 points).

Zloty remained stable

As we mentioned in our morning comment, positive information (better than expected industrial PMI) came to the market, which, however, was not enough to strengthen the zloty. The EUR/PLN pair was around the 4.31 level, so at the level observed at the end of Friday's trading. The uncertainty surrounding the referendum in Catalonia and the strong dollar have hampered the Polish currency's appreciation. The USD/PLN pair reached 3.68 today, although in the following hours, together with a slight rebound in the dollar on the global market, it reached the 3.66 level.

In contrast, the British currency lost in relation to the zloty. This was mainly due to its depreciation in relation to the dollar or the euro, in relation to an increase of uncertainty around Brexit process (i.e. taking a more strict course of Brexit by the Minister of Foreign Affairs compared to the one officially presented by Prime Minister Theresa May) as well as slightly worse than expected data on PMI index for the industrial sector.

In the following hours of trading, stabilisation on the zloty is likely to be observed (unless ISM data is very different from consensus). Investors can expect Wednesday's statement from the two-day Monetary Policy Council meeting on monetary policy. The lack of a relatively hawkish message may put pressure on the zloty, given the prospect of monetary tightening by some of the largest central banks in the world (the US, the eurozone, the UK).

Tomorrow's preview

Tomorrow we can observe a slight decrease in market liquidity both during the Asian session (the next trade-free day in China) and during the European session (Germany trade-free day). Therefore, the volatility in the currency market may be relatively low given that the calendar of scheduled events is also limited.

On Monday, apart from the euro, the pound was also relatively weaker. The GBP/USD quotations fell below 1.33 for the first time since September 14th, which was due to the dollar's appreciation, uncertainty about the Brexit process and worse than expected reading of the manufacturing PMI index.

In turn, on Tuesday at 10:30 am, the IHS Markit/CIPS will present the PMI index for the construction sector for September, which in August, noting its third consecutive reading below consensus, has reached its lowest level in a year (51.1 points). The median of market expectations indicates a further decrease to 51.0 points. In case of another worse than expected level of this index, the pound could be subjected to greater pressure.

It should be noted that the high inflation level (2.9% on an annual basis) and the prospect of monetary tightening by the Bank of England will soon support the British currency. Therefore, on the other hand, the potential revision of its value seems to be limited.