Daily analysis 24.10.2016

Positive information from the euro zone after publishing of accelerating indexes for services and industry. Testimonies from the central banks representatives. The zloty is in a better condition than it was last week. However, the franc and the dollar remains relatively expensive.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

• 15.45: Industrial PMI from the USA (estimations: 51.5 points).

Positive signals from PMI indexes

We received optimistic information from the euro zone. Accelerating indexes for industry and services, which were published by the IHS Markit, have reached their highest level this year. This positive image has mainly been created by the German economy. However, it’s worth noting the relatively positive condition of the French economy as well.

The German industrial index went to its highest level in thirty-three months and it’s currently at the level of 55.1 points (against the estimated 54.4 points). The new order component continues to grow at a rapid pace. This growth has been partially caused by a strong demand from customers from Asia and from the United States. Moreover, the services index returned to the area of 54 points. This goes to show that the two previous readings were a short-term disturbance, rather than the beginning of a negative trend.

Despite a decline in the services index (from 53.3 points to 52.1 points), the French economy is in a relatively positive condition as well. The French industry finally seems to accelerate. This component quoted its thirty-one month maximum. Moreover, the pace of the new export orders has increased the fastest since May 2011. Therefore, there is a chance that the French economy will finally begin to exit its stagnation period.

The only negative surprise is a weak condition of the six other eurozone countries (Italy, Spain, Holland, Austria, Ireland and Greece). The IHS Markit didn’t publish the detailed data regarding these countries in its initial readings. However, it wrote that, “the production growth in the rest of the region has revived from its twenty-one month minimum, but it is still the weakest development in two years.”

In his comment to the initial PMI indexes for the eurozone, Chris Williamson, the IHS Markit chief economist, took note that, “the data from October is consistent with the quarter growth pace which is at the level of 0.4% in the euro zone and at the level of 0.5% in Germany.” However, the consequences for the currency market should be relatively limited for the time being, especially when the decision from the ECB in December begins to near. Of course, these consequences will have a minor impact, when it comes to stopping pressure on the euro.

Testimonies from central bankers

This afternoon, we will only receive the industrial PMI data from the American market. The market’s reaction will be limited, because the same processes have been described by the ISM index. However, the positive condition of the dollar may be slightly altered by today’s statements from the FOMC representatives.

Four of the Fed members will make their testimonies this afternoon. James Bullard, who has the right to vote this year, and Charles Evans, who will have the right to vote in 2017, are both dovish. Their testimonies will concern the economy and the monetary policy. It’s possible that they will both present the arguments in favor of a very mild path of the future interest rates.

On the other hand, Jerome Powell and William Dudley (both have a consistent right to vote) will mostly speak of the debt instrument market. However, since the questions & answers session is planned, there is a chance that they may refer to the monetary matters. They are more consistent with the FOMC consensus than Bullard or Evans. However, there is also a larger chance that their comments would suggest a relatively flat path of interest rates, rather than an acceleration of the monetary tightening in the near future. Therefore, today’s afternoon may be relatively unfavorable for the dollar. This may cause the EUR/USD to go slightly above the level of 1.0900.

Slightly better sentiment on zloty

The zloty has begun to work-off a portion of its losses from the past few days. Perhaps investors took note that a larger chance for extension of the monetary policy in the euro zone is favorable for the Polish currency. A slightly better sentiment in the euro zone, which was caused by the PMI publications, allows to hope that the EUR/PLN will not go towards the 4.34 level.

During the forthcoming hours, the situation on the PLN-related currency pairs should not be changing significantly. The franc will most likely remain slightly below the 4.00 PLN level and the pound will be near the 4.85 level. Only the dollar may give away 0.01-0.02 PLN, if it the American central bankers appear to be more dovish.