Afternoon analysis 30.11.2015

The euro dropeed before the ECB meeting. The zloty did not exploit better than expected reading on the GDP growth. The dollar hit the new high against the Polish currency.

Investors expect the European Central Bank to increase the monetary stimulus on Thursday. The ECB President Mario Draghi is to announce new measures that will increase the probability of meeting the inflation target near 2 percent. In the last few quarters inflation was near the zero level, which increased pressure on the ECB to act.

Among the tools considered by the monetary authorities are increasing the scale of purchases or extension of the program after September 2016. Moreover, the ECB may decide to include low quality assets and municipal bonds to the program. Moreover, additional cut of the deposit rate is expected. All additional tools would be aimed to strengthen credit action.

The ECB President Mario Draghi announced additional actions in October. Since then the euro has remained under pressure. Today the common currency dropped to 1.0562 against the dollar. It was the lowest level since April. A decline below the 1.05 level would open the way to the lowest level since 2003. If the ECB provides additional measures, it may result in the short term declines of the euro.

Waiting for the Fed

The next key event in December is going to be the Federal Reserve meeting. The probability of a hike remained above 70 percent (according to Bloomberg).

Tomorrow the ISM data is scheduled. The report is important to assess the overall performance of the US industry. The forecast is little above the prior month level at 50.1. If the index moves higher, it will signal improvement in industry as the latest reports from the sector were mixed. The PMI index for the US economy will have smaller impact.

Nevertheless, the key factor that may affect expectations before the Fed meeting will be the report on employment situation on Friday. The forecast is for 200k in employment increase. Last month it increased 271k. If the tendency holds, it will support the dollar.

Weak zloty

The GDP growth was better than expected. The economy grew 3.5 percent in the third quarter against 3.4 percent previously estimated. In contrast, the data on inflation rate missed the expectations. The inflation rate stood at minus 0.5 percent against minus 0.4 percent that was expected. The report increased pressure on the MPC to adjust interest rates as the inflation rate remains very far from the 2.5 percent target.

The zloty remained under negative pressure. The Polish currency dropped in spite of positive sentiment in the broad market. Currently, the probability of a stronger zloty is rather limited.