Daily analysis 17.11.2015

Comments from Praet and Nowotny regarding inflation expectations and eurozone economic conditions are pushing the euro lower. Incoming data from the US should not have a significant impact on the dollar. The domestic currency remains stable to the euro.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 14.30: CPI inflation from the US for October (survey: +0.2% m/m and +0.1% y/y; excluding gasoline and food: +0.2% m/m and +1.9% y/y)
• 15.15: Industrial production from the US (survey: +0.1% m/m for October)

Important comments from the ECB

In the last few hours the comments from Peter Praet have become the most relevant topic for the FX market. Published by the Bloomberg news agency interview with the ECB chief economist and Governing Council member may suggest that the European monetary authorities are getting more aggressive regarding loosening the policy than market participants expect.

“It is a key for a central bank to keep inflation expectations anchored, especially in a period of slack in the economy, and we have some signals that these inflation expectations are still fragile. There are risks and this is why we're considering actions. A possible de-anchoring of inflation expectations together with a lot of slack is a dangerous cocktail”, claims Praet.

The chief ECB economist also noted that threats regarding EM economists and the fact that the eurozone rebound is rather more cyclical than structural are the downside risks for eurozone recovery.

Similar comments were presented by Ewald Nowotny. The ECB governing council member from Austria said in Vienna that the euro area's “problem is that we might get into a situation like in Japan – long term growth, low inflation, low rates. That's exactly the perspective we want to avoid”.

Both comments and especially those regarding the unanchoring of inflation expectations are solid arguments to push for more QE and a deeper deposit rate cut than the market expects. Moreover, it is also a negative message for the common currency. Finally, it is also worth looking at the EUR/USD rate. The pair is approaching the 1.05 range, which is a 2015 low. If this level is breached the pair will be falling to 13-year lows. It would also increase markets expectations regarding the calls for parity on the EUR/USD

US data not so important

Despite the fact that the Federal Reserve have suggested several times that incoming data would be crucial for the December rate decision, today's readings can be mostly ignored by market participants, even if they turn out to be less favourable than expected.

It is due to the fact that US manufacturing remains under pressure from lower investments in the mining sector and competitive global disadvantage regarding the stronger dollar. The situation will not change in the following months regardless of the market scenario.

Moreover, the inflation reading should be fairly neutral to the dollar. Only when the core CPI drops below 1.8% y/y then it would be possible to see some stronger correction on the US currency. It would also decrease the expectations regarding the PCE inflation, which is the Fed's preferred measure.

Most expensive dollar for 11 years

Despite the fact that today's readings seem to be important – industrial production and inflation – there is a small chance that they would significantly deviate current trends on currencies. They would probably not change the perspective of monetary tightening in the US and additionally, the EUR/USD should still be under pressure due to more significant than expected monetary loosening in the euro area.

Calm on the zloty

Today the dollar is again close to 11 year highs to the zloty and the USD/PLN is just a fraction below the 4.00 mark. If the current trends on the global FX market remain in place and the EUR/USD tests the 1.05 range the US currency may be worth 4.05 PLN quite soon.

In the longer perspective, the 1:1 parity scenario between the euro and the dollar looks to be more and more probable. However, taking into account that the EUR/USD slide would be a result of both euro weakness and dollar strength, we can expect EUR/PLN to slide towards 4.15-4.20 while the USD/PLN would soar to the same level. In the coming days, it is worth noting the macroeconomic readings from Poland on industrial production and retail sales. If they turn out to be slightly stronger, it can support the PLN by up to half a percent to the major currencies.

Anticipated levels of PLN according to the EUR/USD rate:

Anticipated GBP/PLN levels according to the GBP/USD rate: