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Afternoon analysis 03.10.2017

3 Oct 2017 15:24|Bartosz Grejner

Market volatility has been limited, however, the British currency is close to falling below 1.32 USD. The zloty's quotations were stable, with the exception of the GBP/PLN exchange rate which was decreasing by more than 1%.

Pound under pressure from construction sector data

Tuesday on the currency market was relatively calm. The somewhat poor macroeconomic calendar contributed to this, as well as the trade-free days in Germany, China and South Korea. The main currencies' volatility was limited - the main currency pair, the EUR/USD pair, after testing the 1.17 boundary in the morning, returned to the level observed at the end of yesterday's quotations.

The British currency remained under significant pressure all the time, after today's publication of PMI data indicating the first slowdown in the construction sector in 13 months. One pound cost approx. 1.322 USD, whereas two weeks ago it cost over 1.36 USD, this also meant the lowest GBP/USD rate since September 14th. More PMI data (from the service sector) will be published tomorrow - if they fail the market expectations, the pound may continue to depreciate.

GBP/PLN the lowest in a week

The worse sentiment towards the British currency also translated into strong drops in the pound's relation to the zloty. The GBP/PLN exchange rate has fallen close to 4.85, to its lowest level since last Monday. The zloty's quotations against the rest of the main currencies remained stable due to the limited calendar of scheduled events. The probability of major changes later in the day is also limited.

Some of the market participants may already await events from the second part of the week. Tomorrow, ADP data on employment in the US will be published, as well as the statement after the Polish Monetary Policy Council's meeting. Moreover, on Thursday, minutes from the last meeting of the Governing Council of the European Central Bank will be released, and on Friday a report from the American labour market will be published.

Therefore, in the second part of the week an increased volatility in the currency market can be expected, including higher zloty's fluctuations. For the Polish currency, the worse scenario would probably be good data from the US labour market and dovish rhetoric tone of the MPC. In such a case, the pressure on the Polish zloty could cause the EUR/PLN exchange rate to breach the 4.33 limit and set new, over six-monthly highs.

Tomorrow's preview

Tomorrow, the IHS Markit will present PMI index data for, i.a. Germany, Spain, France and the eurozone as a whole. However, these are the subsequent readings of these indexes, therefore their significant deviation (and thus their impact on the euro) from the previous values is unlikely. At 10:30 a.m., September's data from the UK services sector will be published.

The previous four months were characterised by relatively stable readings of this index in the narrow range of 53.2- 53.8 pts. The median of market expectations points to a reading of 53.2 points, similarly to a month ago. After today's much worse than expected data and the pressure exerted on the pound, tomorrow's reading in the case of significant deviation from the consensus and going beyond that range may increase the pound's volatility.

At 2:15 p.m., the ADP will publish September's non-farm employment data in the US private sector. The market consensus indicates an increase of payrolls by 130k, which is significantly lower than the increase of 237k in August. The lower increase in payrolls may be largely due to the hurricanes that hit some parts of the US. They may give investors some clues about the official data which will be published on Friday (although their correlation is not always good). Slightly better than expected, combined with a hawkish statement from Janet Yellen, the President of the Federal Reserve, who will speak in the evening, may strengthen the dollar even before the publication of Friday's labour market report.

Tomorrow will be published the decision of the Polish Monetary Policy Council regarding interest rates. Changes are not expected, but the message will be more important. Recently, there has been a significant increase in inflation (although most likely due to the rise in fuel and food prices), to which the Council can also refer. A quite hawkish statement and press conference could support the zloty, which is weakened by the perspective of no changes in interest rates until the end of 2018 in the surrounding of monetary tightening in the USA, and the prospects of a more restrictive monetary policy in the UK and the eurozone. In the context of its absence, the zloty may remain under pressure, especially if Friday's data from the American labour market turned out to be better than expected.


3 Oct 2017 15:24|Bartosz Grejner

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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