Afternoon analysis 09.11.2017

The weaker dollar strengthened the euro somewhat but the volatility was low. The European Commission's forecasts proved preferential for Poland - the zloty appreciated despite worse sentiment on the stock market.

EUR/USD above 1.16

During this day, the euro strengthening with a simultaneous weakening of the dollar was observed. Data from the German economy on foreign trade in goods could have helped the single area currency. The trade surplus in September turned out to be higher (by 0.7 billion EUR) than expected and at the same time the highest since November of the previous year. The impact of this data, although positive, was rather limited.

An uncertain fate of the US tax reform may have a greater impact on both currencies' behaviour. Delays in its enforcement or problems with the implementation of corporate tax cuts (in 2018) are currently putting the dollar under pressure, preventing it from appreciating. Today, the EUR/USD quotations have increased to around 1.1640, the highest level since last Friday.

Theoretically, negative data in the context of the US currency quotations has been published from the US Department of Labor. It stated that initial jobless claims amounted to 239k, which was 8k more than market consensus and 10k more than last week. The number of insured unemployed increased to 1.9 million, 11k more than expected.

However, data on jobless claims may still be affected by hurricanes from the beginning of September. Moreover, those readings were still close to 44-year-old lows. Therefore, the impact of today's jobless claims on the dollar is likely to be limited and the EUR/USD quotations will be around 1.1600.

Slightly stronger zloty, better forecast

Yesterday, despite the relatively dovish statement and press conference of the Monetary Policy Council and the worse sentiment on the market (the main European indexes recorded nearly 1% loss), the Polish currency for most of the day was somewhat stronger. The EUR/PLN moved between the range 4.23 - 4.24, testing the lower limit and falling for a moment to the lowest level in over two weeks.

The European Commission's autumn forecasts, which turned out to be exceptionally favourable for Poland, could have helped the zloty. The general government deficit is expected to be at a 1.7% level this year, as in the next year, and is expected to increase to 1.9% in 2019. This is a significant change in relation to the previous projection assuming a deficit of 2.9% in 2017 and 2018, which is mainly due to higher income from taxes and social contributions.

The EC has also made a significant reduction in the case of the structural budget deficit. This year, the projection is expected to amount to 2.1%, in contrast, to previous forecasts of 3.2%. Although in 2018 it is expected to increase to 2.3%, still significantly below (by 0.8 percentage points) the previous projection. The calendar of scheduled events in the following hours is limited, so if we do not observe a significant depreciation of the main US market indexes, the zloty will probably stabilize around current levels.

Tomorrow's preview

Now, the pound is under additional pressure from internal problems in the UK Prime Minister Theresa May's Cabinet, after a second minister has left her government within a week. Tomorrow, it may be the subject to additional fluctuations connected with September's data publication on industrial production by the Office for National Statistics (ONS) at 10.30 a.m.

The ONS data exceeded the market expectations (1.6% vs. 0.8%) a month ago and showed a third consecutive month of production growth in the sector. August's growth pace was also the highest since February this year. Currently, the market consensus assumes an increase in activity in the sector by 1.9% compared to the same month of the previous year.

In addition to the industrial production data, ONS will present production data in the construction sector at the same time. Last month's report significantly exceeded the market consensus - an increase of 3.5% per year turned out to be as much as 3.3 percentage points above expectations. Now, they indicate a slowdown to 2.2%.

Additionally, at 10.30 a.m., September's data on the UK's international trade in goods balance will be published. A month ago, in contrast to the aforementioned data, it turned out to be much worse than estimated. The deficit of 14.24 billion GBP was by 3 billion higher than market expectations, about 1.5 billion higher than last month, and it also proved to be the highest in history. The median of market expectations points to a drop to 12.8 billion GBP in September.

If tomorrow's publications indicate a further increase in the industrial production growth pace and maintenance of its relatively high pace in construction production, the pound could get the support it needs, taking into account internal problems in the UK and the difficult Brexit negotiations. However, the aforementioned trade balance should be kept in mind. Moreover, a worse than expected reading could limit the potential positive effects associated with the reading of industrial and/or construction production.