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Afternoon analysis 26.10.2017

26 Oct 2017 15:09|Bartosz Grejner

The ECB's decision to limit the bond-buying program was in line with expectations, but the euro remained under pressure and the dollar benefited from it. The Polish currency showed no significant changes after the quantitative easing reduction was announced.

ECB in line with expectations, EUR/USD pair below 1.18

The ECB's monetary committee as expected has left interest rates unchanged. It also announced a reduction in asset purchase program from 60 billion EUR to 30 billion EUR per month from January 2018. According to the statement, the program is "due in September 2018 or longer if necessary". It seems that this change could have contributed to the euro's depreciation just after the ECB’s statement, as the reduction to 30 billion EUR and duration time till September were in line with market consensus.

Ultimately, however, the reduction in the asset purchasing programme is a response to the improving eurozone economy's condition and rising inflation, although at a slow pace. In the long term, this may result in the gradual appreciation of the euro due to the perspectives of interest rate increases (which, according to the ECB, will not come to life before the end of the QE tapering).

In the meantime, there has been information that the Catalan authorities have withdrawn their intention to declare independence. This resulted in a clear improvement of the market sentiment since the uncertainty factor was eliminated - the main Spanish market index increased by about 2%. It helped the other main indexes, which, however, already gained slightly less (less than 1%).

There has also been further speculation on the race for the seat of the Federal Reserve President. Today, Politico reported that both Kevin Warsh and Janet Yellen are already outside the race. This would increase the chance of John Taylor, who may be considered a bit more hawkish than the current President (Yellen).

As a result, the euro weakened and the dollar was strengthened. The main currency pair quotations, i.e. the EUR/USD, decreased from approx. 1.181 to 1.174. In the following hours, however, the euro pared some of the losses, along with an increase in investor activity in the US.

Zloty remained stable

As expected, an increase in fluctuations in the zloty's quotations around the time of the ECB publications was observed. Ultimately, however, the ECB's statement had a limited impact on the zloty's exchange rate. The EUR/PLN pair remained at the level of 4.24, as it did yesterday. The zloty, on the other hand, lost a little in relation to the dollar which was strengthening after the ECB's decision, although the USD/PLN exchange rate remained within the range of fluctuations within the last few days.

Today, the situation for the Polish currency has not changed - its value will probably still be supported by the good condition of the Polish economy. In the context of the fact that we already know the plan to reduce the quantitative easing program in the eurozone, further actions of the Polish Monetary Policy Council seem to be important. If the majority of members suggest that monetary tightening might be possible before the end of 2018, the zloty may still be in relatively good shape.

Tomorrow's preview

The calendar of tomorrow's scheduled events is relatively limited. Market participants are likely to continue to discount yesterday's message from the ECB. In this context, however, at 2.30 p.m., the preliminary data on GDP growth pace in the third quarter will be published.

Now, the median of market expectations points to a reading of 2.5% per year. However, if we look at the previous quarters, the first publications were often lower than the final data. In the previous quarter, the pace finally turned out to be 0.5 of a percentage point higher and in the corresponding period of the previous year by 0.6 of a percentage point.

A reading of more than 0.2 of a percentage point from the consensus could slightly increase the dollar fluctuation range. However, given that the initial readings most often differ from the final ones, the ultimate dollar's response may be limited. The fate of tax reform and fiscal stimulus in the US may have a slightly greater impact on the US currency. Misunderstandings within the Republicans' camp may put negative pressure on the dollar, as they reduce the chances of their introduction since 2018.


26 Oct 2017 15:09|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.

See also:

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