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Afternoon analysis 04.12.2017

4 Dec 2017 15:15|Bartosz Grejner

Reports of the reached agreement between the UK Government and the EU strengthened the pound. The dollar gained due to events in the US Senate, but the scale of appreciation is limited. Good sentiment in the market helped the zloty - the EUR/PLN pair again dropped below the 4.20 boundary.

Stronger franc and dollar

The calendar of scheduled publications for today was limited, but strengthening of the pound and the dollar was observed. The British currency gained 0.8% against the euro, causing the EUR/GBP quotations to fall to their lowest level since the beginning of November (0.876). In turn, the pound's exchange against the dollar (GBP/USD) rose above 1.35 to the top two-month price range.

Significant pound appreciation has been observed after Bloomberg's reports suggesting that the settlement of an agreement between the UK and the European Union on the Brexit bill is already close to a breakthrough on Monday and will probably be concluded today. In the case of borders with Ireland, an agreement was reached between the two sides. Confirmation of these reports could result in a continuation of the pound's appreciation trend.

Also, the dollar was in a slightly better shape today after the US Senate voted for a draft of tax system changes. However, the scale of its appreciation was smaller in relation to the British currency. Although the probability of a tax reform has increased. Before it can happen a few more votes are necessary and a final version must be sent to the President.

Therefore, the market will probably not fully evaluate the impact of the tax cut. The EUR/USD quotations, although at 3.00 p.m. were about 0.4% at the level of approx. 1.185, but this was within the range of last week's fluctuations. The dollar may gradually strengthen in the following hours, although the appreciation pace may be limited.

Stronger zloty

It is true that the Polish currency has been depreciating in relation the stronger pound (approx. 0.3%) or the dollar (approx. 0.1%) today, but it has clearly appreciated in relation to the franc, the euro or the local forint. The EUR/PLN quotations fell again slightly below the 4.20 boundary. Good sentiment in the stock market connected to the approval of this draft tax reform in the US helped the zloty. The main European indexes gained around 1.5% around 3.00 p.m.

If we don't observe worsening of the market's sentiment during the US session, the zloty may remain in a relatively good condition. The GBP/PLN quotations came close to the 4.80 boundary - official confirmation of agency reports that an agreement between Theresa May's government and the EU negotiators on the Brexit bill and the Irish border has been reached may result in breaching this boundary and open the way to 4.85 or even higher.

Tomorrow's preview

At 10.30 a.m., IHS Markit will publish November's PMI index for the UK service sector. Today, an analogous index for the construction sector which has positively surprised with the highest level since June was published. However, this publication had a limited impact on the pound. Should tomorrow's PMI services be close to October’s six-month record (55.6 points) or above, it could support the pound slightly. The median of market expectations currently indicates a reading of around 55.0 pts.

Before midday, the MPC decision regarding the level of interest rates in Poland will be known. Neither the market consensus nor the Council itself assumes that they will change, therefore, the subsequent statement and press conference with the participation of MPC President Adam Glapiński (which will begin at 4.00 p.m.) will be much more important. In terms of the last better than expected data, for example, about the GDP growth pace, industry PMI or inflation (which reached 2.5% per year in November), more members of the Council can see a possibility to raise interest rates before the end of 2018.

In case of such a scenario, the zloty appreciation could be observed. However, the message coming from the Council seems more likely to remain unchanged for the time being and it can only signal that it will be monitoring inflation in the coming months. This may cause a slight zloty weakening, which will continue to be influenced by external factors.

At 4.00 p.m. ISM will publish the index on the US service sector activity in November. In the previous month, this index reached 12-year highs (60.1 points). Currently, the median of market expectations points toward a decrease by 1 point in November. Although the fate of tax reform in the USA, which probability of being introduced after the weekend increased significantly, has currently the biggest impact on the dollar, the reading close to recent records (or above) could further strengthen the dollar.


4 Dec 2017 15:15|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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