Afternoon analysis 04.01.2017

Collective PMI (industry and services) for the euro zone increased to its highest level in one year. Moreover, inflation appeared to be the highest in three years. The Polish currency is becoming stronger. The EUR/PLN was pushed down to 4.37.

Positive data from the euro zone and the United Kingdom

Today, IHS Markit published the services PMI data, as well as collective PMI data from the euro zone for December. Activity in the services sector reached the level of 53.7, which was slightly more than expected (53.1). Collective index was also better than expected and reached the level of 54.4. Economic expansion has been quoted in Spain (six-month maximum), Germany (five-month maximum), France (one-and-a-half-month maximum) and Italy (the only country with lower growth).

Markit presented analogical data for Germany as well, which also appeared better than expected. However, both indexes quoted a significant price pressure, which translated to higher production costs. Today, we also received the building PMI from the United Kingdom. This index has been gradually increasing after going below the level of 50 points.

In December, the building PMI reached the level of 54.2 points, which was its highest level since March 2016. This growth was fueled by an increase in new orders. However, companies experienced a significant expense pressure, due to increasing prices of imported resources. Eventually, this translated to the highest increase in production costs in five-and-a-half years.

According to Eurostat, the euro zone’s inflation in December, was growing at its fastest pace in three years. The CPI index increased by 1.1% YoY. Prices of food and energy increased by 2.5% and 2.1%, respectively. To compare, analogical components in Germany increased by 2.5% both. Moreover, prices of services increased in Germany by 1.5% YoY, while the same component increased by 1.2%. The euro zone’s baseline index (excluding energy, food, alcohol and tobacco) reached the level of 0.9% YoY. In Germany, the same index was at the level of 1.5%.

The dollar lost against the majority of currencies today. The EUR/USD was near the level of 1.0450. Today, currency exchange rates will be determined by the minutes from the FOMC meeting in December. We claim that its message will be relatively hawkish. If this happens, the dollar will strengthen and the EUR/USD will return below 1.04. Taking into consideration the recent decisions from the FOMC (rate hikes and estimation of three rate hikes for 2017), as well as mild monetary policy of the European Central Bank, it seems that potential dovish message would have a limited impact on the dollar’s value.

Zloty is stronger

The zloty continued its strengthening this afternoon. The dollar’s weakness caused the USD/PLN to go near 4.19. Moreover, the EUR/PLN reached the level of 4.37, which is its lowest level since the 11th of November. The zloty’s condition is improving against the forint as well. The PLN/HUF was gradually increasing to the level of 70.5, which took this pair further away from its three-year minimum.

Tomorrow’s events

At 2.15 PM, ADP will publish the data regarding changes in employment of the American private sector for December. This data will most likely increase volatility of the dollar’s quotations. However, if the reading is within the range of 150k – 200k, this should be relatively neutral for the American currency (consensus: 170k). At 2.30 PM, the American Labor Department will publish the data regarding last week’s jobless claims. This index reached its historical minimum (233k) at the beginning of November. Since then, its value has been gradually increasing (265k, last week). The market consensus is at the level of 260k. Due to the fact that jobless claims index remains near its historical minimum, this reading will most likely have a minor impact on the dollar.

At 4.00 PM, we will receive the American services ISM data for December. Yesterday’s positive data regarding the industrial ISM (54.7 points vs 53.6 points) increased the expectations regarding services. The market consensus is at the level of 56.7 points, which is 0.5 points less than in November. If the reading is better than the consensus, this may support the dollar. After yesterday’s reading of the industrial ISM data, the EUR/USD increased its fourteen-year minimum (1.034), which showed that the dollar’s appreciation was strong. However, the dollar wore-off this morning and the EUR/USD came near the level of 1.0450.

At 4.30 PM, the EIA will publish its weekly report regarding the American oil market. Two previous reports showed an unexpected increase in the oil supply, as well as a decrease in the local production. Currently, the market consensus assumes a decrease in supplies by 1.715 million barrels. This would support the oil prices, which decreased suddenly after reaching their maximum this year. We should expect that this reading may increase the volatility level. Let’s also keep in mind that the global oil producers have planned to limit their production since the 1st of January. This may increase the volatility level.