Afternoon analysis 05.12.2017

The UK currency remained weakened due to the failure of the EU-UK agreement. The dollar strengthened, even though trade data indicated the highest deficit in 2.5 years. No changes for interest rates in Poland, the zloty is waiting for the MPC statement and press conference.

Pound still under pressure

Today, the British currency was losing value after talks between Theresa May's government and the EU negotiators did not end in agreement. According to the European Commission spokeswoman Margaritis Schinas, the Commission is ready to resume talks as soon as it receives a sign that the London Government is ready. As a result, the pound's quotations in relation to the dollar (GBP/PLN) fell below the 1.34 level in the morning.

The pound gradually pared its losses in the following hours - despite the difficulties with its final conclusion, it seems that the chances of coming to an agreement is closer than last week. There is still a controversial issue regarding the Irish border. The Democratic Unionist Party (DUP) opposition (the party which is in the coalition with the May government) probably failed to reach an agreement on Monday. However, if this issue were resolved (talks are to be resumed this week) and an agreement was reached, the pound could significantly appreciate due to the reduction of the hard Brexit risk.

Stronger dollar despite weak data

The dollar index (DXY) gained nearly 0.3% around 3.00 p.m. and the euro's value fell to 1.183 USD, matching Monday’s lows. This was despite the fact that the balance of the US trade turnover was worse than expected (by 2.30 p.m.) in October. The deficit in trade in goods and services amounted to 48.7 billion USD, although the market consensus assumed that it would be 1.2 billion USD lower. It was also the worst result in 2.5 years.

However, the relatively weak condition of the euro (after worse than expected retail sales data in the eurozone) and the higher probability of introducing a tax reform in the USA (after the vote in the Senate) may have helped the dollar. During subsequent trading hours, the dollar may still fluctuate. At 10.00 a.m., ISM will publish data on service activity index in November.

A reading close to last month's 12-year highs (60.1 points) or higher could strengthen the dollar and, given the relatively weak euro today, cause a drop in the EUR/USD pair to around the 1.18 boundary or even below. Now the median of market expectations points to a reading of 59 pts.

Zloty in relatively good condition

According to expectations, the Monetary Policy Council (MPC) has left interest rates unchanged in Poland (1.5%). However, the MPC statement and press conference (at 4.00 p.m.) may be important. The recently increasing inflation (2.5% YOY in November), which exceeded the last projections and the improving condition of the Polish economy, may provoke more members of the MPC to consider the possibility of raising the rates even before the end of 2018.

In the event of such a message, the zloty could appreciate. Its absence, on the other hand, may still be proof of a dovish attitude of the majority of the Council and may postpone the prospect of higher rates before the end of 2018. This option seems to be more likely and it is not excluding the possibility of the zloty from being slightly weakened after the MPC press conference.

On the other hand, external factors had a dominant influence on the zloty. The globally strengthened dollar caused that the USD/PLN quotations rose from 0.4% to almost 3.56% around 3.00 p.m., the highest level since Thursday. On the other hand, the EUR/PLN pair remained close to yesterday's level of 4.2050, which may change during the MPC press conference. Its hawkish tone could result in euro depreciation to around 4.19 PLN. On the other hand, the aforementioned more likely scenario of signalling inflation as a transitory scenario may contribute to an increase in the EUR/PLN exchange rate above 4.21.

Tomorrow's preview

At 8.00 a.m., the Federal Statistical Office (Destatis) will publish October's data on factory orders. This data may give an indication of industrial production in the following months. In the previous two months, its growth of 4.1% and 1% per month respectively was observed, which was clearly above market expectations. Orders may fluctuate significantly from month to month, and the market's consensus forecasts a 0.3% decline in October compared to September. However, if this data were to surprise positively with 1% or more growth, it could help to improve the market sentiment, which may translate into a better condition of emerging countries currencies, including the zloty.

The most important event of tomorrow will most probably be the ADP publication on the employment change in the non-farm sector private in the US in November. In the previous two months, the impact of September hurricanes was observed, which disrupted the readings and as a result, reduced the impact of this data on the dollar. Wednesday's ADP data may also give indications on official employment data, which we will see on Friday in the report of the US Department of Labor.

The increase in August's employment amounted to 228k and a month after it increased by 100k, which turned out to be the lowest for approximately 5 years. In October, when employers increased employment levels after hurricanes in September, ADP pointed to an increase in employment in the sector by 235k employees (the highest level since March). The median of market expectations currently indicates a drop in growth rate to 185k.

Probably only a reading outside the 150-230k range could cause a visible dollar reaction. It should be remembered, however, that the correlation with the official data is not ideal and if the data deviates slightly from the consensus, the market may ignore this publication.