Afternoon analysis 24.11.2017

Good data and a positive sentiment contribute to the EUR/USD increase to 1.19. The zloty has significantly strengthened against the Swiss franc and the dollar - new lows on the CHF/PLN pair and the USD/PLN.

Euro clearly appreciated

During today's session a further appreciation of the euro was observed. The single currency has been supported by other good eurozone's data - this time it was the record of the German investor confidence index. It has probably contributed to an improvement in the market sentiment, as there was an increased appetite for risk - the main indexes of European markets were growing at around 1% before 3.00 p.m.

The good sentiment in the market and the lower liquidity due to yesterday's Thanksgiving Day and today's shorter session in the US led to a rise in the main currency pair quotation, EUR/USD, to around 1.19, the highest level in two months. Moreover, the US dollar index (DXY) which measures the strength of the US currency in relation to the 6 main currencies, fell below 93 percentage points, to its lowest level since mid-October.

The US currency is burdened by recent information from the US market - consumer inflation expectations lower than consensus expectations (according to a study by University of Michigan) and increased uncertainty about the rate hikes in 2018 after the publication of discussion record after the last meeting of the FOMC.

The calendar of macroeconomic events for the upcoming hours is practically empty, and the stock market in the USA is currently closed, a few hours earlier. IHS Markit will publish November's preliminary PMI data for the industry and services sector in the US. Both indexes are expected to slightly improve by 0.2 pts. and 0.3 pts respectively. However, in the case of the US economy the reading of ISM is relatively more important, therefore the impact of this data on the dollar is likely to be limited.

Zloty still in better condition

With slightly less liquidity in the market today, the Polish currency was relatively stable. In relation to the euro, the zloty was close to yesterday's levels - the EUR/PLN oscillated around the 4.21 level. The value of the one Swiss franc has decreased to the lowest level since mid-January 2015 - the rate of 3,607 PLN is only 6 gr more expensive than before the release of its exchange rate to the euro. The globally weaker dollar also caused the USD/PLN to depreciate to around 3.537 today.

The probability of significant changes in the zloty's valuation later in the day is limited. However, next week greater fluctuations may be observed. The fate of the US tax reform may be settled, which may strengthen the dollar and slightly weaken the emerging markets currencies, including the zloty. Moreover, on Thursday the inflation readings from the eurozone and the US will be published, which may also increase the volatility of the zloty's trading.

Next week's preview

One of the most important events of the next week may be the tax reform project's fate in the US. The vote on the reform in the Senate will probably take place at the beginning of the week. It becomes more and more likely that the reform will pass in the US Senate, which could mean that the reform will be passed. This could strengthen the dollar, which has incurred significant losses in recent days due to increased uncertainty about the inflation growth path. Lower taxes could give additional momentum to inflation growth, which would also increase the possibility of monetary tightening in 2018.

Thursday may be a significant day for the currency market. In the morning, November's preliminary consumer inflation (CPI) data in the eurozone will be published. Market expectations indicate a reading of 1.6% per year, which would be the highest level since March. A slightly higher than consensus reading could strengthen the euro, although the core reading (without the impact of the most volatile prices) is more important in the context of confirming inflation trends. A month ago, it fell to 0.9% YOY, and the median of expectations points toward an increase to 1% in November. The monetary committee of the European Central Bank continues to view inflation trends in the eurozone as "suppressed" and requiring the continuation of an accommodative monetary policy. Core inflation that exceeds 1% could suggest the possibility of earlier monetary tightening and support the euro.

During the next part of the day the PCE inflation data in the US in October will be published. This type of inflation is taken into account by the Federal Reserve in its inflation forecasts, therefore it may give hints on the probability of rate hikes. In the previous two months, its core index (excluding energy and food prices) was 1.3% (on an annual basis), which was the lowest level in almost two years. Currently, the market consensus assumes its growth to 1.4% per year and 0.2% per month. A PCE inflation core index of 1.5% (or higher) could suggest positive inflationary trends and strengthen the recently weakened dollar.