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Afternoon analysis 10.11.2017

10 Nov 2017 15:39|Bartosz Grejner

Macroeconomic data is favourable to the pound, but the negotiations on Brexit are likely to limit the growth of its value. The Polish currency, close to yesterday's levels - deviations from them in relation to the pound and franc result mainly from external factors.

The GBP/USD pair the highest for no more than one week

During today's, a strengthening of the British currency has been noted. The pound strengthened in relation to the dollar to its highest level since November 2nd and one pound cost 1.32 USD. However, Some of its increases were due to the US currency weakness. The dollar was under pressure due to problems with implementation of the tax reform, in particular, corporate tax cuts in 2018.

The Senate in the US is the biggest “obstacle” right now in introducing tax reductions for companies next year. If the Senate version of the tax reform was voted, they could be reduced only in 2019, which could exert additional pressure, i.a. on the stock, bond and dollar markets. As a result, today has been observed an increase in the euro's value in relation to the dollar - the quotation of the main currency pair (EUR/USD) increased to about 1.1660 boundary, the highest level since week.

The pound, in turn, gained from the data on industrial production and foreign trade. In both cases, they exceeded market expectations; only data from the construction sector showed a lower than expected increase in production. Generally, the data shows that the British economy is still in good shape. However, the pound's appreciation may be limited. The Bank of England's decision to raise interest rates showed that the UK central bank was more focused on inflation and the condition of the labour market.

During a press conference in Brussels today, David Davis, Minister in for Theresa May's Brexit Government, said that "significant progress" has been made in the negotiations with the EU but at the same time that further progress requires if both parties were to agree on the bill to be paid by the UK for leaving the EU. After these reports, the pound was additionally strengthened. However, as long as no agreement is reached on this issue, the pound is likely to have limited appreciation potential.

No major changes on the zloty

The Polish currency remained relatively stable today. The EUR/PLN pair oscillated around 4.23 boundary, the level observed yesterday. Zloty’s relation to another currency of the region, the Hungarian forint, was also close to yesterday’s levels. The relatively small changes on the pound were observed, which was appreciating globally. Today, the GBP/PLN grew by nearly 0.5% to approx. 4.80, the upper limit of yesterday. The CHF/PLN was about 0.3% lower than yesterday (approx. 3.647), although this movement was caused by external factors. The franc was losing to the euro or the dollar at the similar level.

The following hours the zloty's quotations may depend on the main market indexes in the US behaviour. If recent drops ( due to uncertainties surrounding the tax reform) worsen, they could lead to a fall in yields of the US Treasury bonds and a further decline in the dollar. In such a case, the zloty could gain slightly, although the positive effect related to the potentially lower value of the US currency could be offset by a deterioration in the market’s sentiment. Potential changes on the zloty in the following hours are likely to be limited.

Next week's preview

On Monday at 2 p.m., the Polish Central Statistical Office (GUS) will publish October's data on consumer inflation (CPI) in Poland. This will be the second reading (preliminary reading indicated 2.1% YOY), but containing more detailed data on price changes in each category. This may give a better view on the factors currently determining the relatively high level of inflation in Poland. It is likely that food and fuel prices will continue to be its the main factor, so the impact of these data is likely to be limited.

At the same time, the GUS will also present data on Poland's current account balance in September. August's reading indicated an account deficit of 100 million EUR. However, it was lower by approx. 500 million EUR from market expectations and after the second month of decline in a row, it fell to its lowest level since January this year, when the historical surplus record (2.58 million EUR) was set.

The median of expectations assumes a deficit of 622 million EUR in September. The impact of this data is likely to be limited unless the current account balance is close to August or even positive. In such a case, the zloty could appreciate, taking into account its stable level, after a relatively dovish Wednesday's statement and a press conference of the Monetary Policy Council.

Tuesday may turn out to be a very interesting day on the currency market because there are a lot of important publications planned for that day. Already at 8 a.m., data on inflation in October and the rate of economic growth in Q3 of Europe's largest economy, i.e. Germany, will be published. This is the second inflation reading, therefore the chances of differences from the initial values (1.6% YOY, 0.0% MOM) are limited. However, GDP growth data may have significant impact on the euro, especially if it deviates from market expectations (2.2% YOY, 0.6 QOQ).

Three hours later, a second reading of the GDP growth pace in the eurozone will be published - preliminary data from the end of October significantly exceeded the median of market expectations (2.5% vs. 2.1%). If it turned out that the second reading differs significantly from the initial reading (by 0.2 percentage points or more), we can observe an increase in volatility in the euro - especially on the EUR/USD pair, taking into account the relatively low volatility of this pair quotations in the last two weeks.

We can also expect significant fluctuations in the British currency. Just before midday, consumer inflation (CPI) in the UK for October will be known. A month earlier, it reached the 3.0% level on an annual basis, amounting the 5.5-year records. In the meantime, we had a meeting of the monetary committee of the Bank of England, at which interest rates were risen in line with expectations.

However, it was a dovish increase, as the probability of further increases is currently very low. The median of market expectations assumes further inflation rise to 3.1% per annum. A reading above this level could slightly strengthen the pound, as it would increase the probability (although slightly) of a further increase.

Wednesday is also an interesting day for both the dollar and the entire currency market. On that day, consumer inflation data (CPI) in October will be published. In September, it increased to 2.2% (0.1 percentage points below expectations) per year, the highest level since March this year. However, core inflation (excluding energy and food prices) remained at 1.7% level between May and September.

The market also expects this value in October. Therefore, deviations from it may cause bigger dollar movements. With a higher than 1.7% reading, apart from the dollar’s appreciation, we could observe a weakening of the emerging countries' currencies, including the zloty - taking into account still relatively dovish tone of the Polish Monetary Policy Council.


10 Nov 2017 15:39|Bartosz Grejner

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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