Afternoon analysis 29.11.2017

Supported by the greater probability of a tax reform and better than expected data on GDP growth pace mean that the EUR/USD fell to its lowest level in nearly a week. The zloty is still in relatively good condition, the EUR/PLN pair fluctuated around 4.20 PLN.

Dollar appreciates

Today, the US currency was noticeably stronger after there was an increase in the chances of a draft tax reform voting in the Senate in the USA yesterday. A publication by the Bureau of Economic Analysis (BEA), which provided a second estimate of GDP growth in Q3, also gave positive information to the dollar. According to BEA data, the US economy grew between June and September at a rate of 3.3% year-on-year. This is by 0.1 percentage points more than the market expectations and 0.3 percentage points from the preliminary estimate.

Half an hour earlier (at 2.00 p.m.), the Federal Statistics Office (Destatis) presented preliminary data on the consumer inflation level (CPI) in the German economy. It showed an increase from 1.6% in October to 1.8% in November (in annual terms). This is by 0.1 percentage points more than expected although the euro did not respond positively to this data.

Despite the better than consensus reading, one of the main reasons for this was the 3.7% increase in energy prices (mainly oil), compared to the same month of the previous year. Although the pace slowed down slightly, food prices continued to rise strongly (by 3.2%) in the analogous period. After a significant decrease in the growth pace in October (to 1.2%), in November the growth rate of prices in the services sector increased to 1.5% compared to the same month of the previous year.

As a result, the dollar was clearly increasing in value, even though, an appreciation trend was seen since yesterday. The dollar index (DXY) increased immediately after the publication of the GDP data to about 93.4 points, the highest level over a week. On the other hand, the price of one euro fell to 1.182 USD just before 3.00 p.m.

Zloty still in good condition

A positive sentiment on the market due to the increase in the stock market indexes supported by the zloty's trading, among others. The EUR/PLN quotations oscillated around 4.20 for most of the day, after they determined 5-monthly lows during the morning part of quotations (about 4.188). In contrast, the pound appreciated in relation to the zloty when according to The Telegraph and The Financial Times, Great Britain agreed with the EU negotiators on the "Brexit bill". Around 3.00 p.m., the price for the British currency was by 0.8 PLN higher than yesterday's 2.5-monthly lows.

If we do not observe a significant deterioration of the sentiment on the market (sales on the stock market in the US), we can expect stabilization on the zloty exchange rate in the coming hours. Today's volatility on the zloty may also be limited due to the relatively empty calendar of scheduled events in the following hours compared to tomorrow's one, when data on inflation in Poland, the eurozone and in the US will be published or the Senate's decision on the tax reform.

Tomorrow's preview

At 11 a.m., Eurostat will publish November’s preliminary consumer inflation (CPI) data for the eurozone. The median of market expectations points to an increase in inflation from 1.4% to 1.6% per year now. However, the core reading (excluding the most volatile prices) may be much more relevant in the context of euro quotations. In October, it fell from 1.1% to 0.9%. Currently, the median of expectation indicates an annual increase of up to 1%. A reading above this level could strengthen the euro, as the probability of a faster monetary tightening by the European Central Bank (ECB) would increase slightly. However, only a systematic increase in core inflation and a rise of more than 1.2% (over 4-year highs) could result in a significant increase in the single area currency valuation.

At 2.00 p.m., the Polish Central Statistical Office (GUS) will present the preliminary estimates of consumer inflation (CPI) in Poland in November. The market expectations indicate an increase from 2.1% last month to 2.3% per year. This would also be the highest inflation level since December 2012. While similarly to eurozone's inflation, the shape of core inflation trend is more important. In case of tomorrow's reading of the Central Statistical Office (GUS), the reaction of the zloty will probably be limited - the preliminary estimation is given without any breakdown into categories, so it will not be obvious how it was affected by the most volatile prices in November, i.e. food and fuel.

Half an hour later data on PCE inflation in the USA in October will be published by the Bureau of Economic Analysis (BEA). This type of inflation is taken into account by the Federal Reserve in its inflation projections, therefore tomorrow's publication may give some indications as to the distribution of the rate hikes in the following year (in December, the increase is practically certain). In the previous two months, inflation remained at almost two-year lows, i.e. at 1.3%. The median of market expectations currently indicates an increase to 1.4% YOY and 0.2% YOY in comparison to the previous month. A reading exceeding the consensus by 0.1 percentage points or more, it could slightly increase the probability of increases next year and therefore, strengthen the dollar.

On Thursday evening, it is also likely that there will be a vote in the US Senate on the tax reform. Yesterday's adoption in the Senate's Budget Committee makes it more likely that it will be voted through in the Senate. With a good reading of PCE inflation (in line with consensus or higher), the dollar could get an additional boost to its value.