Afternoon analysis 07.11.2017

Today, the EUR/USD pair fell to new, nearly four-month lows. After fluctuations in the first half of the day, the zloty value in relation to the main currencies remained close to yesterday's levels.

Euro under pressure, a stronger dollar

The euro was under pressure today - a stronger dollar did not help in the euro's valuation as well. In relation to the Swiss franc, the euro was the cheapest for three weeks, and in relation to the dollar for almost four months. The main currency pair's quotations (the EUR/USD) fell below the 1.16 boundary to approx. 1.1555 - the lowest level since July, 20th.

Mixed data for the euro has come to the market. Despite the strong retail sales increase in the eurozone (by 3.7% YOY, the highest for over 2 years), industrial production in the largest Europe's economy recorded a bigger than expected decline. In September, in Germany, it fell by 1.6% compared to the previous month, which turned out to be half of the market consensus’ assumption.

The expectations for today's industrial production data could have been slightly elevated due to yesterday's reading on new orders in the sector. Orders increased by 1% per month, while a 1.5% decrease was expected. The calendar of scheduled events for the following hours is limited in the case of significant publications or speeches that could have a significant impact on the main currencies, therefore we may expect a consolidation around the current level of exchange rates.

No significant changes for the zloty

The Polish currency quotations were subject to fluctuations due to the global dollar or the franc's appreciation, however, they remained close to yesterday's levels. The price per unit of the aforementioned currencies was approx. higher by 1 gr in relation to the zloty compared to yesterday's closure. The EUR/PLN pair, in turn, was quoted in the range of yesterday's closure (around 4.24), similarly to the GBP/PLN or the PLN/HUF around 3.00 p.m.

In the following part of the day, the probability of significant changes in the zloty valuation seems to be limited. On the one hand, due to the lack of important publications, but also in expectations for tomorrow's Polish MPC statement and press conference.

The macro data (wages, inflation, GDP) may suggest that more MPC members may tend to tighten monetary policy, which could support the zloty. In the case of continued mild rhetoric, the zloty could even incur some losses, especially if we continue to observe an increase in the dollar's value.

Tomorrow's preview

Around midday, the Polish MPC will publish its decision on interest rates. A change is not expected, however, the message hidden in the MPC's statement and press conference (4.00 p.m.) may be significant. Until now, the Council has been relatively dovish in its monetary policy stance (no increases before the end of 2018).

However, the lasting inflation above 2% YOY, wage pressure (the last two months are characterised by monthly ages increases above 6% YOY) and the economic growth pace above 4% (in Q3, the market consensus indicates a further increase to 4.5% YOY) may cause a larger part of the Council to consider an earlier rate hike.

Since the effects for the real economy associated with rate hikes are delayed, the Council can suggest the possibility of earlier monetary tightening to counteract potential economic overheating. In the case of such, a more hawkish message, the zloty could become stronger and the price for 1 euro may fall to about 4.20 PLN.

At 4.30 p.m., the Energy Information Administration (EIA) will publish a weekly report on the US fuel market, which may have a significant impact on oil prices. In the past few days, the price of WTI oil has risen to more than 57 USD, the highest level since mid-2015. The latest price increases are due to declining global oil stock, OPEC's expected prolongation of production restrictions (at the end of November) and the latest domestic reshuffles in Saudi Arabia.

Relatively high oil prices may exert pressure on inflation growth, which in turn, may increase the probability of rate hikes in countries where monetary policy tightening has already been speculated about. Currently, the market consensus assumes a further draw in crude oil stock, as well as in fuel and distillate stocks. Confirmation of this data could further strengthen prices.

It should be noted, that the higher level will naturally increase the profitability of shale oil production in the US. The rise in US oil production may, in turn, put downward pressure on oil prices, limiting its growth potential. With these relatively high prices of 'black gold', some US producers can also secure their future sales, which may also exert a supply pressure on oil prices.