Daily analysis 17.10.2017

17.10.2017 12:12|Bartosz Grejner

The US currency is supported by good sentiment, Janet Yellen’s potential successor and better than expected data. Inflation in the UK reached 3% for the first time in 5.5 years and it was 1 percentage point above the Bank of England's target. The zloty awaits for data from Poland.

Key macro data (CET time - Central European). Estimates of macro data are based on Bloomberg data unless otherwise noted.

  • 2:00 p.m.: Employment in Polish enterprise sector (estimate: +4.6% YOY),
  • 2:00 p.m.: Wages in Polish enterprise sector (estimate: +6.2% YOY),
  • 3:15 p.m.: Industrial production in the US (estimate: +0.3% MOM).

A stronger dollar

Today, the US continued the appreciation trend that was observed in recent trading days. The euro, in relation to the dollar (EUR/USD), traded close to 1.175 - the lowest level in a week. The better condition of the dollar was created due to several factors. Yesterday's trading day on the US market ended with a historical record of the main indexes: i.e. Dow Jones, Nasdaq and S&P500.

Good sentiment influenced US Treasury bond yields, which in turn, directly supported the dollar. Although yesterday was limited in the case of macroeconomic data, the afternoon's manufacturing index publication by the Fed has shown that this index has reached the highest levels in seven years.

Moreover, yesterday’s reports published that US President Donald Trump may favor John Taylor, the economist from Stanford University, to become the President of the Federal Reserve. Taylor is perceived as more hawkish (he is in favor of relatively higher interest rates) than current Fed President Janet Yellen.

However, the list of candidates for Fed President is long and the uncertainty may, on the other hand, limit the potential appreciation of the dollar. This week has been limited in the case of scheduled publications from both the US economy and the eurozone. Therefore, the attention of market participants may be focused on political issues (tax reform in the US, EU leaders' summit starting on Thursday).

After the depreciation connected to news reports yesterday on the possibility of breaking Brexit negotiations, the pound pared most of its recent losses in the morning. The pound's quotations in relation to the dollar (GBP/USD) rose to 1.329 before midday, a level similar to that observed before the Brexit announcement.

At 10.30 a.m., the Office for National Statistics (ONS) will present September data on consumer inflation (CPI) in the British economy. The headline inflation reading was 3%, the highest in 5.5 years. In turn, core inflation (excluding energy and food prices) was 2.7% and was the highest since December 2011. The aforementioned data was in line with expectations and will likely have a significant impact on the pound's valuation.

The Bank of England has already signalled rate hikes in September, which can be expected at the next meeting in November. Inflation is currently 1 percentage point above the inflation target (2%). Rate hikes are likely to take place in a climate of weakened economic growth and the uncertainties associated with the Brexit process. These factors may limit the pound's growth potential, despite the expected tightening of the monetary policy.

In turn, the ZEW Institute provided weaker than expected economic sentiment data in the eurozone. The ZEW economists' confidence index fell unexpectedly in October to its lowest level since March this year. After the publication, an increased pressure on the euro was observed - the EUR/USD quotations fell close to the daily lows (1.1750). Eurodollar quotations may be significant for this afternoon's data on industrial production in the US in September. If the reading does not disappoint expectations (0.3% growth per month; increase by 0.1% in manufacturing), we may have to deal with a further appreciation of the dollar, with it testing 1.17.

The zloty without major changes

The Polish currency’s quotations looked relatively stable in the morning. The EUR/PLN quotations oscillated around 4.23, falling for a moment to 4.2270, which was the lowest since the beginning of September. The zloty's quotations in relation to other main currencies were near yesterday's boundaries as well as the Hungarian forint. In the afternoon (at 2.00 a.m.), data from the Polish labour market will be published, but it may give some arguments to increase the level of the zloty's fluctuation.

The data on wages may be important for the zloty. In August, wages increased by 6.6% in relation to the analogical period of the previous year, which was its highest growth pace in 5.5 years. The median market expectation currently points to an increase by 6.2% in September. However, if it turns out to be higher than 6.2%, the zloty could appreciate.

This would mean higher pressure on inflation growth, which turned out to be relatively high (headline 2.2%, core 1.0%) in September. In this type of scenario, it would be more probable that members of the Monetary Policy Council would have a wider discussion on the possibility of rate hikes.

 


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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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