Afternoon analysis 05.11.2015

Comments from the Federal Reserve members pave the way for a hike in December. The European Commission cut the forecast for the eurozone. The pound dropped after the Bank of England's press conference. The zloty gained on sentiment improvement in the broad market.

Federal Reserve Chair Janet Yellen confirmed that she is ready to support an interest rate hike in December. The Fed President said the decision will be made after assessing economic reports in the period before the Federal Open Market Committee's meeting. Similar remarks were made by other Fed members who have spoken in public within the last 24 hours (William Dudley and Stanley Fischer).

As a result, the dollar increased to the highest level since late July against the euro. However, in the second part of the day the US currency dropped due to weaker than expected labor market data. The number of unemployment claims increased 16k to 276k. It was the largest increase in the last eight months. All in all, the result below 300k is considered as proof that the labor market is strong, and the EUR/USD rebound was a correction.

EC cuts forecasts

The reports from the eurozone have been mixed. The Eurostat said that retail sales dropped. The reading was weaker than the forecast. In spite of quite good sentiment reports (Ifo and PMI) the reading on industrial orders showed a strong decline. However, the reports which were published earlier (PMI reports, unemployment rates and inflation) were all quite good.

The European Commission cut the outlook for the eurozone in 2016. The GDP is expected at 1.8 percent and inflation at 1 percent. In May, the EC expected 1.9 percent and 1.5 percent, respectively. Given the situation, a slight improvement in the GDP forecast for 2015 to 1.6 percent from 1.5 percent is not very important. Inflation this year is expected at 0.1 percent (no change).

The forecasts were lowered during the ongoing discussion on whether the European Central Bank should provide more stimulus. Especially, a lower forecast for inflation is the major challenge for the monetary authorities. ECB President Mario Draghi said at the October press conference, that in the December meeting the central bank may decide to expand its stimulus. Since then, the euro has been under pressure, and today's rebound was only a correction.

The zloty exploited the opportunity

The Bank of England cut the forecast for GDP growth and inflation. The inflation rate is expected to remain below the 1 percent level to the second half of 2016. The monetary authorities consider the emerging market slowdown as a factor that limits the growth and inflation in spite of a quite good domestic situation. Moreover, the pound is quite strong and it limits price pressure. The British currency dropped after the release.

As expected, the National Bank of Poland cut its forecasts for growth and inflation. However, the current Monetary Policy Council is not going to adjust interest rates. However, the composition of the MPC will be changed at the beginning of 2016, thus it may alter the monetary authorities' stance. If that is the case, the zloty will be negatively affected.

In contrast, the European Commission lifted the forecast for Poland. The GDP growth is expected at 3.5 percent against the 3.3 percent forecast in May. The growth will stay the same in the next two years. Domestic demand will support the growth. The EC is expecting that the unemployment rate will decline significantly. What is important, the EC predicts the government's deficit to be 2.8 percent GDP. It may be hard to achieve given the spending plan presented by the new government.

The zloty exploited the opportunity to recoup some losses. The Polish currency gained mainly against the pound (hit by the BOE's comments). Additional support came from the overall improvement in sentiment. However, the outlook for a stronger zloty is clouded by the Fed's plan to tighten the monetary policy.