Afternoon analysis 27.10.2017

Good news for the dollar for the next day in a row - GDP growth in the US significantly exceeded expectations in Q3. The Polish currency pared some losses, but the USD/PLN pair has been traded the highest for 3 weeks.

EUR/USD below 1.16

It was another good day for the dollar. After yesterday's appreciation connected with the extension of the ECB's asset purchasing program and the opening by the US Congress the path to tax cuts, this trend continued today. The US dollar index (DXY), which measures the strength of the US currency against the six main currencies, has risen today to its highest level since mid-July. The main currency pair, i.e. the EUR/USD pair, tested the 1.1600 level. It is the lowest price per euro we have seen since July 20th this year.

The better than expected economic growth pace in the US for Q3 has also helped the dollar today. The Bureau of Economic Analysis' publication (BEA) indicated a 3% increase in GDP between July and September (quarter-to-quarter, annualized), which turned out to be 0.5 percentage points above the median of market expectations. Consumption spending by Americans also exceeded expectations (by 0.2pps) and increased in Q3 by 2.4% compared to the analogical period of the previous year.

Significantly, the investment component increased by 6%. At the same time, it was the biggest increase in investments in three quarters, when their growth was noted at 8.5%. The publication resulted in the small EUR/USD depreciation below the 1.16 level. In the following hours, the calendar of events is practically empty - the data consumer confidence index of the University of Michigan will be published, but it will be its second reading, therefore, its impact on the dollar will be limited.

Hence, a relatively calm afternoon part of quotations will probably run rather smoothly, as the probability of stronger dollar movement is limited.

Slightly stronger zloty

After yesterday's weakening, we could observe an improvement in the zloty condition. Still, around 9.00 a.m., the EUR/PLN was traded slightly over 4.26, while at 3.00 p.m., it was already about 4.246. Similarly, the zloty strengthened in relation to the franc, pound or the Hungarian forint. On the other hand, the global dollar's appreciation caused that its price expressed in Polish zloty increased to nearly 3.67 PLN on the interbank market today - the most since October 9th, this year.

The next hours are likely to bring stabilization on the market, and the risk of significant changes is limited. However, next week may turn out to be much more important for the zloty, when the PCE inflation data and labour market report in the US will be released. If they turn out to be good enough to cause further dollar appreciation, it could result in a capital outflow from emerging countries, including Poland, and as a result, weaken the zloty.

Next week's preview

We can already observe relatively large fluctuations on the currency market in the first 2 days of next week. On Monday, PCE inflation data for September will be published. This is the type of inflation preferred by the Federal Reserve in the US to project future price developments, therefore, its publication may result in a relatively significant dollar fluctuation. Especially in the context of its recent appreciation after Thursday's ECB and approval by the US Congress of a new budget that brings the way closer to tax system reform and fiscal stimulus. Core inflation (excluding energy and food prices) slowed down to 1.3% YOY in August. A further decline could reduce the probability of monetary tightening in the US and put pressure on the dollar.

In turn, on Tuesday, October's preliminary data on consumer inflation in the eurozone and economic growth pace in Q3 will be published. Taking into account the decision to extend the asset purchasing program until at least September 2018 by the ECB, inflation data may have a relatively limited impact. However, readings that significantly deviate from the consensus (by 0.2 percentage points and more) could still considerably affect the euro's valuation, as they could slightly change the expectation that it would be appropriate to continue the QE tapering beyond September 2018.

Thursday, on the other hand, may turn out to be an important day for the pound. After a two-day meeting, the decision of the monetary committee of the Bank of England (BoE) will be released. The British monetary authorities already pointed out at the last meeting that interest rates could be raised. The failure of the Monetary Committee members to vote for an interest rate increase could put the British currency under negative pressure.

On Friday another set of significant data for the dollar will be published. The Department of Labour will publish a monthly labour market report (for October). The most important data seems to be on changes in employment and wages. Last month's report was mainly positive, although it was still slightly disturbed by September's hurricanes. Therefore, it is possible to expect a significant payroll increase in the private sector (approx. 300k new jobs). Data on wages could be more important - a monthly wage growth of more than 0.3% could indicate higher inflationary pressure and additionally, support the dollar.