Afternoon analysis 05.10.2017

Minutes from the last monetary committee meeting of the European Central Bank - the members' views are in line with expectations, although the issue of the euro's exchange rate has been mentioned many times. Better than expected macroeconomic data supports the dollar. The pound has incurred some losses after reports of a possible demand for the UK Prime Minister Theresa May's resignation. The Polish currency quotations remained stable - the EUR/PLN pair at approx. 4.30 level.

EUR/USD pair still above 1.17

Today's publication of minutes (records of conversations) has not introduced major changes in the euro's quotations. Its rate in relation to the dollar was still moving in a relatively narrow range observed over the last few days, i.e. 1.17-1.18. The ECB's members, similarly as in previous statements, have stated that an accommodative monetary policy will still be needed (to move inflation towards the target).

The ECB members devoted a lot of attention to the euro's exchange rate during the last meeting, which after significant increases was approx. 1.20 in relation to the dollar. There was no agreement on the factors that caused this appreciation (factors like, the better economic situation in the eurozone or reduction of political risks, were mentioned).

However, the ECB members agreed that the recent significant fluctuations in the euro (appreciation) are a source of uncertainty and that monitoring of the exchange rate and its impact on price stability in the average time are required. Although the EUR/USD pair was at a target range, its quotations moved towards the 1.17 boundary over time.

A good condition of the dollar, that was caused by better than expected data from the US economy, was also responsible for this. The number of submitted jobless claims turned out to be lower by 5k and amounted to 260k in the previous week. August's goods trade deficit was lower than consensus and reached 42.4 billion USD and was the lowest since October 2016.

However, the likelihood of a significant drop below the 1.17 boundary on the main currency pair still seems to be limited. Investors' attention is likely to move towards tomorrow's labour market report in the US, which may stop some market participants from making significant changes.

Zloty relatively stable

Quotations of the Polish currency, similarly to the main currency pair, remained close to yesterday's levels. The EUR/PLN pair was still close to approx. 4.30, although aforementioned, the afternoon's slight appreciation of the dollar caused an increase in the USD/PLN exchange rate from the 3.65 level observed in the morning to approx. 3.67 - however, it was within the fluctuation range that was observed last week and probably tomorrow's labour market report may result in breaching this fluctuation range.

The pound remained under pressure - the GBP/PLN trading fell below 4.82, the lowest level since last Monday. During this week, the British currency has noted a downward trend, which can be continued. "The Telegraph" reported before 3 p.m., that a percentage of Tories are ready to demand a resignation from the British Prime Minister Theresa May by the end of the year. The increase in uncertainty associated with this may cause further depreciation of the British currency, despite the Bank of England's perspective of monetary tightening.

Tomorrow's preview

At 2.30 p.m., the most important data from this week will be released: the US Department of Labor will publish September's report from the US labour market. Data on employment and wage change will be in the spotlight. The former will be disturbed by a hurricane that hit some parts of the US a month ago. However, on Wednesday ADP presented data indicating a better than expected increase in employment in the private sector (by 10k), which was expected to be 135k in September.

Currently, the market expectations for official data indicate an increase in employment in the private sector by 83k payrolls, however, better than expected ADP data may also increase expectations for Friday's reading. The most significant, though, seems to be the data on the change in the American average wage.

The median of economists' expectations indicates their increase in growth of 0.3% as compared to the previous month and 2.6% in relation to September 2016. In August, the monthly growth amounted to 0.1% and 2.5% on an annual basis. Better than expected wage growth could result in a significant dollar appreciation, caused by an increased wage pressure on inflation and therefore, a higher probability of rate hikes in the US. An appreciation in wages by 0.4% on a monthly basis would mean the highest increase since October last year and a 0.5% in just over 10 years.