Daily analysis 23.11.2017

Inflation expectations in the US and minutes from the Fed's meeting weakened the dollar. The euro was supported by surprisingly good PMI readings from the single currency area. The zloty appreciated due to good sentiment in the region. The EUR/PLN pair close to 4.21 and the USD/PLN pair near the 3.56 level. Publication of minutes from the Polish MPC and ECB in the afternoon.

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

• 1:30 p.m.: Minutes from October's ECB meeting,
• 2:00 p.m.: Minutes from November's Polish MPC meeting.

A few elements that weakened the dollar

For the last few hours a strong dollar weakening could be observed. The pressure on the US currency was caused by several factors. First of all, yesterday's macroeconomic readings from the US (durable goods orders) did not delight. It could be expected that the data would exceed rather than fail the expectations.

The publication of the University of Michigan inflation expectations was an interesting element in the context of more and more frequent discussion on the slow growth of prices in the US economy. In theory, this data should be practically omitted from the analysis, as it was already the second reading for November and the final publications rarely attract as much attention as preliminary readings.

However, inflation expectations in the long term (5-10 years) were by 0.1 percentage points lower than in the initial reading and amounted to 2.4%. Apart from one publication, inflation expectations did not fall below 2.4% in the thirty-year history of this parameter. It is also worth noting that now we are more likely to be in the middle or near the end of the business cycle when these expectations are likely to rise rather than fall. Although this is not, of course, the only index of future inflation, it may be an argument for the more dovish part of the Fed to push forward its vision of the monetary policy. Shortly after this publication (4.00 p.m.) we could see another wave of the US currency weakening and a decrease in the yield on the US Treasury bonds.

As a result, the market was pessimistic towards the dollar before the minutes' publication from November's FOMC meeting. In addition, the very records of the Fed's discussion sounded dovish. In many places, references could be found about fears relating to the pace at which inflation would return to its target and speculation about whether the recent slowdown in price increases would be temporary or permanent.

Although this discussion does not affect December's decision on rate hikes and probably also the subsequent monetary tightening by 25 basis points in the first half of next year, however, further increases in core inflation would be less and less likely to continue at the current levels. Market concerns about the further fate of monetary policy in 2018 increased pressure on the dollar.

However, it should also be noted that next year does not have to be negative for the dollar at all. If inflation accelerates, the dovish part of the Federal Reserve will start to go silent quickly and investors can instantly value further tightening of monetary policy, especially if Congress was to succeed in voting for tax cuts for companies and households since 2018.

Astonishing PMI readings from the eurozone

A very good run of leading economies in the eurozone is still visible. The preliminary general reading of the industrial PMI index for the single currency area breached 211-month highs and reached the level of 60 points. Only once, in more than 20 years of IHS Markit history, has this index had a higher value (April 2000). The sub-index of new orders in the industry was similar.

The employment component was also greatly above expectations. In the collected data for services and industry, it has grown at the fastest pace since 2000, and for industry alone, November was the best month in the history of this sub-index. However, it should be remembered that apart from strong increases in production growth new orders and employment, there are also price or backlog components. On the one hand, this may force an increase in investment, but on the other hand, it may also slow down future growth.

In summary to the data Chris Williamson, the head of economists at IHS Markit, wrote that current PMI data indicates a GDP growth rate of 0.8% in Q4. If these expectations are confirmed, this year's eurozone economy will develop at the fastest pace in 10 years. As a result, the global weakness of the US currency due to concerns about the rate of inflation reaching the target in the US and the support for the euro from the very good PMI publication led to an increase in the EUR/USD to around 1.1840.

Support for the zloty

The zloty appreciated for the next day in a row. This time the Polish currency is supported by a decrease in the yields of the US Treasury bonds and a very good eurozone economic situation. The EUR/PLN traded close to the 4.21 boundary around midday and the USD/PLN tested the 3.55 level. The zloty also remained close to the highs of many months in relation to the forint. The Hungarian currency is less sensitive to global factors (both when sentiment is improving and worsening) and has recently been under pressure from the accommodative monetary policy of the local central bank.

Even though there is no session in the US today, the early afternoon may be interesting for the zloty. The ECB will publish minutes from the last meeting of the FOMC. They may be less dovish than a statement or conference, which can further support the EUR/USD pair and maintain pressure on the USD/PLN pair. On the other hand, the NBP will publish minutes from November's MPC meeting. It is possible that, as in the case of the ECB, it may be somewhat more hawkish than the statement from the Council itself. This, in turn, may further support the overall zloty valuation and even give the possibility to test the zloty’s limit of 4.20 per euro.