Afternoon analysis 31.10.2017

Preliminary data indicates that inflation in Poland is expected to remain at 2.1% year-on-year in October. Today, the EUR/USD quotations are within a narrow fluctuation range, but an increase can be expected tomorrow.

Slightly better inflation, a stronger zloty

Today, preliminary data from the Polish Central Statistical Office (GUS) showed that consumer inflation (CPI) amounted to 2.1% year-on-year in October, which was in line with median market expectations. Price changes, in comparison to the previous month, exceeded the consensus by 0.1 percent and increased by 0.5%. However, this would probably not be enough to significantly strengthen the zloty, but today's GUS data may support its current valuation.

The aforementioned data points to a relatively high level of inflation, which could, in turn, convince the MPC member majority to consider interest rate hikes before the end of 2018. To start a broader discussion on this, inflation in the coming months would have to remain at similarly high (or higher) levels. In this type of scenario, the zloty might gain, hence the forthcoming inflation reading for November and December proving to be crucial.

Confirmation of more than 2% inflation helped the zloty, which was in better shape today. However, these are still small changes in relation to the euro - the EUR/PLN pair moved again in the range of 4.24 - 4.25 today. However from midday it was gradually moving towards the lower boundary of this range. On the other hand, the franc was visibly losing value in relation to the main currencies (i.a. to the dollar and the euro) and was also losing to the Polish currency. Today, the franc's value has fallen to approx. 3.65 PLN, the lower limit of the last three trading days.

No major changes on the EUR/USD pair

Although the main currency pair's quotations, i.e. the EUR/USD, have moved away from the 1.16 boundary, its fluctuation range has been relatively narrow today and has ranged between 1.163 and 1.165 since the start of trading on European markets. Nearly empty macroeconomic calendar for later hours suggests that the probability of significant deviations from this range is rather limited.

Despite the scheduled events in the next part of the week (e.g. the Federal Reserve meeting, labour market reports in the US), an increase in foreign exchange market volatility may be affected by reports of the election of a new Federal Reserve President or new information on tax system reform.

If tax reduction were to be expanded over several years, the dollar could be put under pressure and lose part of the recent profits. This could, in turn, be good information for emerging countries, including the zloty, which may appreciate at the expense of the weakening of the US currency.

Tomorrow's preview

Tomorrow, an increased volatility in the currency market caused by the publication of more important data than in the previous two days may be observed. At 10.30 a.m., October's PMI data for UK industry by IHS Markit/CIPS will be published. The market consensus assumes only a minimal change in this index - a decrease of 0.1 pts to 55.8 pts, which is within the range of the last three months (55.3 - 56.7 points). Reading within these limits would probably not result in a significant pound's valuation. However, a PMI of more than 57.3 pts could strengthen the UK's currency, as this would mean the highest value for the index since November 2013.

At 1.15 p.m., ADP will publish data on changes in employment in the private sector. Recent ADP data differed relatively from the official reading from the Department of Labour. In both cases, however, this was influenced by the hurricanes, which affected some of the US states in September. The median of market expectations assumes payrolls increase by 200k. Reading in the range of 150k - 200k would probably not have a major impact on the dollar. It should also be noted that the impact of aforementioned hurricanes was probably also felt to some extent in October and that recent ADP and the Labour Department's' publications differed significantly. This may result in tomorrow's ADP data having only a limited impact on the dollar.

On the other hand, at 3.00 p.m., October's ISM PMI index for the industrial sector in the US will be published. A month ago, the reading of 60.8 pts exceeded market expectations by 2.8 pts and set new highs of more than 6 years. Now, the market consensus points to a fall to 59.5 points. The reading close to this level could support the dollar, confirming a positive trend in the US industry.

At 8.00 p.m., The US Federal Reserve will publish the statement after the two-day meeting of the Monetary Committee (FOMC). The increase in interest rates is not expected, but the rhetoric of FOMC statement may be more important. If it had changed from the month before, we could expect a major change in the dollar. However, the chances for this are limited - in the meantime, inflation readings did not diverge from consensus, and data from the labour market proved to be mainly positive (although partly disturbed by hurricanes). Therefore, it is more likely that the FOMC statement will have limited impact on the dollar.