Afternoon analysis 04.11.2015

Today's reports support the tightening scenario in the US. The Monetary Policy Council left rates unchanged. A slightly higher zloty.

More optimistic data from the eurozone. After solid reports from industry, today's data on the service sector were also quite good. The readings showed that the monetary union is not susceptible to the slowdown in the emerging markets (especially in China).

The report showed an increase in orders, which is an important leading indicator. During the previous week, data on unemployment and inflation were also above forecasts. Given the situation, pressure on the European Central Bank to act has been softened. The decision is expected in early December.

Fed is more important

In spite of solid reports from the eurozone, the EUR/USD remained under pressure. Currently, the major factors are the expectations concerning the Federal Reserve. Today's reports support the tightening scenario at the next Federal Open Market Committee's meeting.

The ADP data on employment change was in line with the forecast. Companies employed 182k new workers in October. Employment only dropped in manufacturing. The tendency has been flagged by the ISM report. The ADP reading is a positive hint before the monthly labor market data. The forecast is for a 180k increase in non-farm payrolls.

Moreover, the data on international trade increased the probability of hikes this year. The deficit dropped to 40.8 billion dollars from 48 billion dollars in the prior month. It was above the forecast. In addition, export increased and import dropped - this is a positive tendency which is supporting the GDP growth. Earlier this year, the Fed warned that a strong dollar is hurting the growth. Today's report softened this negative factor.

Lael Brainard from the Fed said that the December decision will be data-dependent. In October the FOMC pointed directly at the December meeting as the possible moment for hikes. Given the recent reports, the probability of tightening is rising.

It is reflected in the dollar's developments. The EUR/USD dropped to the lowest level since early August. This move has been strengthened by signals coming from the ECB. However, the ECB has recently diluted its dovish stance.

Weaker euro

As expected, the Monetary Policy Council left interest rates unchanged. The major rates stood at 1.50 percent. It is the lowest level in history.

Today the zloty basket (against the euro, dollar, pound and franc) posted gains. However, the move was relatively modest. Although the political risk has been limited, the rebound potential is constrained. The major factor responsible for the situation is the Fed. In contrast, the ECB's impact on risk assets is still not visible. Given the situation, the zloty will remain under the influence of expectations concerning the Fed.