Afternoon analysis 13.12.2016

The British inflation increased more than expected and supported the pound’s appreciation. The ZEW index sustains a positive trend for Germany, as well as for the euro zone. Optimism in the American economy increases. The zloty stabilizes.

Positive data for the pound

The Office for National Statistics informed that the British CPI increased in November (1.2 YoY vs 1.1% YoY). The base case inflation (excluding food and energy prices) increased as well (1.4% YoY vs 1.3% YoY). This reading confirms the upper trend of the British inflation, which lasts since October 2015. Moreover, the 1.2% YoY increase was its largest growth in more than two years.

The above results were mostly caused by an increase in transport prices, as well as in restaurant and hotel prices. The contribution of prices for education, recreation and culture was slightly lower. However, when it comes to MoM growths, recreation, culture, shoes and clothes made the largest contribution.

Higher inflation supports the pound. Today, the British currency gained basically against every currency. The GBP/USD increased above 1.27. Tomorrow, the market will receive the data from the British labor market. This may impact the pound’s value as well. However, the Federal Reserve announcement will have the largest impact on the eventual evaluation of the British currency.

Optimism is dominating

Today’s ZEW institute survey shows that positive sentiment for the German economy, as well as for the euro zone’s economy, has been sustained in December. Even though index of economic expectations for Germany remained unchanged (13.8), the evaluation of the German economy increased by 4.7 percentage points. The expectation index for the euro zone increased to the level of 18.1 and neared its level from June.

However, optimism increased the most regarding the American economy. The percentage of economists who evaluate the American economy better is currently at the level of 55.4%. Therefore, its current general rate is at the level of 53.9. This is slightly less than evaluation of the German economy (63.5). Moreover, the percentage of economists who expect the American economy’s improvement increased by 14.7%. At the same time, the percentage of economists who have a negative opinion about the American economy, decreased by 13.2%. This caused the ZEW expectation index to grow to the level of 45.6 (13.8 for Germany and 11.1 for Japan).

Positive sentiment was not dominant everywhere. Expectations towards the British economy remain negative, despite relatively positive macroeconomic data, as well as their slight improvement in December. The expectation index increased by 7.7 (negative 39.7). This was mainly caused by an increase in percentage of economists who expect improvement (3.8%) and a decrease in percentage of economists who expect the situation of the British economy to deteriorate (3.9%).

Today’s ZEW data had a minor impact on the euro. The market is still dominated by the FOMC-related sentiment. After the Federal Reserve meeting tomorrow, we will know the announcement regarding interest rates. However, positive tendencies in the euro zone should be positive for the euro in the short-term.

Calm trade on zloty

Fluctuations on the zloty were relatively limited today. This was mainly due to Fed’s announcement tomorrow. However, partially by the lack of significant macroeconomic data. Nevertheless, we could see a slight wear-off on the zloty, along with nearing of the opening of the New York stock exchange market (4.45 on the euro and more than 4.14 on the franc).

The stronger pound caused the GBP/PLN reached the level of 5.33. We can expect more significant moves tomorrow. This is due to the Federal Reserve meeting, as well as to more macroeconomic data. The latter will most likely increase the fluctuation on the currencies, which are sensitive to the global sentiment, including the zloty.

Tomorrow’s events

The decision from the Federal Reserve regarding interest rates, will determine the global sentiment tomorrow. This will be announced at 8.00 PM. However, in the meantime there will be more significant announcements that may increase the market fluctuations.

At 10.30, the Office for National Statistics (ONS) will publish the data from the British labor market. We will know the salary growth index for October. This index has been gradually increasing since mid-2014 and it was at the level of 2.3% in September, which was the second highest growth this year. The market expects the same result for October.

The ONS will also present the data regarding the British unemployment rate for October. This index has been in depreciation trend since the beginning of 2012. In September it reached the level of 4.8%, which is above near its eleven-year minimum (4.7%). The market expects the unemployment rate to remain unchanged. Moreover, we will know the amount of jobless claims for November. This index was increasing between March and October (except for July), and previously it appeared extremely disappointing (9.8k vs 2k).

The market expects a 5.5k increase of this index for November. This should have a negative impact on the pound. However, we need to keep in mind that the jobless claims index is volatile in Month over Month interpretation. The British labor market is in a relatively positive condition. Therefore, its data may support the pound’s appreciation. The British currency has been gradually working-off its losses since the beginning of November. Moreover, the GBP/USD could reach the level of 1.28.

At 2.30 PM, the Census Bureau will present the retail sales data for November. This data is significant, because it’s one of the main consumer expense indexes, which determine the majority of economic growth. Therefore, this reading may cause increased fluctuations on the dollar. The retail sales index was increasing more than expected in September and October (1% MoM and 0.8% MoM, respectively). The market expects a 0.5% growth of this index for November.

At 3.15 PM, the Federal Reserve will present the industrial production data for November. After declines in August and September (0.5% and 0.2%, respectively), this index remained unchanged in October. However, one of its components quoted a 2.6% MoM decline (utilities). Activity of industrial processing increased 0.2% MoM and the mining sector increased by 2.1% MoM. However, the latter sector decreased 7% YoY, which contributed to a 0.9% YoY decline of industrial production.

Nevertheless, this index will have a limited impact on the dollar, despite that the industrial production is significant for the economic growth (although, less significant than consumption.) In a wide interpretation, the production data may impact the expectations regarding the GDP growth in the fourth quarter, which may impact the dollar.