Daily analysis 16.11.2017

The dollar is stronger than it was yesterday, but the EUR/USD pair is still close to the 1.18 boundary. Further risks for another tax changes in the US? British retail sales are the lowest in over 4 years, the zloty slightly appreciated and the euro costs in the range of 4.23-4.24.

The most important macro data (CET - Central European Time). Surveys of the macro data are based on the information from Bloomberg unless noted otherwise.

• 2:30 p.m.: Weekly initial jobless claims in the US (estimates: 235k),
• 3:15 p.m.: Industrial production from the US (estimate: +0.5%).

Rebound on the dollar

In recent days we have pointed out that some of the US currency declines, and consequently increases in the EUR/USD pair, are not confirmed by macroeconomic data or debt instrument market behaviors. The culmination of these contradictory behaviors was noticed yesterday afternoon.

Data on US core inflation for October exceeded the estimates of 1.8% by 0.1 percentage points. In monthly terms, the prices of used cars (0.7% MOM) and medicines (0.3% MOM) rebounded. The healthcare component and the general inflation index of services have increased by 0.3%, which may mean that inflation's lows are behind us. Data on retail sales were also positive in the dollar's context. In October, retail sales increased by 4.6% YOY and by 4.0% YOY in the first 10 months of this year. This shows the improving condition of the US economy and should support the dollar.

However, just after the data, another wave of the dollar weakening was seen, which proved that the recent quotations have little in common with macroeconomic factors. The EUR/USD pair reached 1.1860 boundary. In the following hours, the dollar started to increase significantly. The EUR/USD session ended with almost 100 pips below (1.1770). The trading in Europe was also close to this level in the morning.

Apart from the economic issues that should support the dollar, there is still a discussion on tax system reform in the US. Yesterday, Ron Johnson was the first Republican Senator to openly oppose tax changes. He admitted in the Wall Street Journal that he will not vote for this tax package.

Publications in the upper house of Congress have only 52 out of 100 seats, which means that every vote of support is very important. Yesterday, Senate leaders also announced that they intend to introduce some changes in healthcare along with the tax law. First of all, health insurance is to be ended. According to the CBO (Congressional Budget Office) estimates, quoted by the Financial Times, it is expected to bring 338 billion USD savings in the next 10 years, mainly due to the fact that fewer Americans will take out insurance, which is financed with federal funds. This change, if of course will take place, results in a lower risk of exceeding the 1.5 trillion deficit limit associated with the planned tax reduction.

Retail sales in the UK the lowest since over 4 years

The ONS (Office for National Statistics) data on retail sales in the UK was weak. Its annual growth rate decreased by 0.3% YOY, which was the worst reading since March 2013.

However, the pound did not react to this data, mainly because it was close to expectations. Economists expected weak results due to a very high core effect in October 2016. Then, sales increased by 7.5% YOY, mainly due to favorable weather conditions (sales of clothes and shoes). The British currency is also currently reacting primarily to Brexit and local politics. Therefore, the impact of both good and worse data can also be limited.

Improving sentiment on the zloty

Improved trading on European markets and S&P 500 futures contracts, indicating a higher session opening in the US, also supported the zloty. The EUR/PLN pair returned to the range of 4.23-4.24, i.e. about 0.25% lower than during yesterday's closure. The Polish currency is also strengthened in relation to the forint, which confirms that the zloty is more sensitivity to the external situation than the HUF.

The following hours on the Polish currency should not cause more rapid changes. If the EUR/PLN sentiment continues to improve, it may fall slightly. If good sentiment persists in the US, the dollar is likely to appreciate. However, this should still be relatively limited.