Daily analysis 27.10.2017

27 Oct 2017 12:30|Marcin Lipka

A statement from the ECB triggered a fall in the euro and the subsequent global dollar's appreciation worsened the EUR/USD depreciation. The reaction to the US GDP may be dependent on sentiment. The zloty suffered primarily from the stronger dollar. The pound, franc and dollar clearly appreciated. The EUR/PLN pair close to the 4.25 boundary.

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

  • 2:30 p.m.: Preliminary GDP reading for Q2 in the US (estimates: 2.6% QOQ annualised).

The ECB and data from the US clearly depreciated the EUR/USD pair

Yesterday's ECB decision and press conference should not surprise for the market. According to Bloomberg's consensus, the amount of the quantitative easing will be reduced by the ECB to 30 billion EUR per month and the asset buying program will last at least until September 2018.

During the press conference, there was also no information that had surprisingly dovish tone. Therefore, the entire statement from the ECB was practically the same as one could deduce from the previously published reports. So why is EUR/USD about 200 pips lower than during yesterday's morning?

In the context of the ECB's impact on the exchange rate of the main currency pair, it is worth noting that between 1.45 p.m. (the publication time of the decision) and 3.30 p.m., (end of the conference) the depreciation was quite limited and closed in about 60-70 pips. This decrease can be explained by the form of a fairly orderly statement from the monetary authorities. The first four key monetary policy issues indicating the dovish attitude at the beginning reduced the chance of early withdrawal from QE. With a strong statement, there will also be fewer arguments for further euro growth, e.g. higher than expected inflation. However, maintaining the suggestion that a worsening of inflation prospects may increase the scale of asset purchasing program left the impression that the ECB is still fundamentally very dovish.

Another over 100 pips drop in the EUR/USD pair has been already a global effect of the US currency's strengthening. The session in the US started well, and the indexes there were supported by better than expected results of market's companies.

Therefore, the House of Representatives also voted in favour of senatorial changes to the budget. Kevin Brady, one of the Republican co-authors of the tax system reform, quoted by the Financial Times, stated that he would publish a detailed tax development plan on November, 1st. Paul Ryan, the Speaker of the Lower House of Congress, said that the budget vote "brings us one step closer to the historic tax reform". Bloomberg, on the other hand, wrote that the Republicans still wanted to vote on the fiscal changes until the Thanksgiving Day (November, 23rd).

Pro-dollar's mood has been also sustained by Politico's information that Janet Yellen was probably no longer taken into account in the race for the position of the Federal Reserve President. Now, the choice is probably between Powell (close to consensus) and Taylor (hawkish).

The change of sentiment was also confirmed by the behaviour of Treasury instruments. The yields of the Treasury bonds maturing in 2-year increased to the highest level in almost 9 years and exceeded 1.62%. Spread between the US and German instruments with the same maturity (2 years) has risen to the highest levels since 17 years. The difference in yields between 10 year of government bonds of the US and German expanded by 10 core points and exceeded 205 bps yesterday.

As a result, the ECB's statement that started to be more dovish has thus become a catalyst for the euro's downward revision, but the changes in subsequent hours were mainly driven by the dollar's appreciation. The sum of these movements caused the EUR/USD to fall to around 1,1600 level.

The depreciated zloty

Until yesterday's session in the USA opened, the movements on the zloty from the ECB side were limited. The EUR/PLN pair was slightly weaker, while the pound, the dollar and the franc were slightly stronger. The clearer movements were made in the following hours. The increases in yields of the US government bond and the general appreciation of the US dollar pushed PLN much lower. Growth on the dollar reached 6-7 gr. In the case of the pound, it was 5 gr, the franc 3-4 gr. The EUR/PLN pair climbed above the 4.25 boundary.

Today's morning trade is bringing a calmer mood. Investors are also waiting for GDP readings from the US for Q3. Taking into account the moods of the last hours, the market interpretation of the results may be selective. With better readings than consensus (above 2.5% QOQ annualized) the US currency has a chance to appreciate due to the good economic situation in the US. On the other hand, a publication below consensus does not have to be particularly negative for the US dollar, as investors can still assess it from the perspective of hurricanes that disturbed economic performance at the beginning of the quarter. This is also why it would be expected that the results will improve in the coming months. The next few days may be difficult for the Polish zloty, especially if the tax changes in the United States are going to come to life, or if the Fed is turned into a slightly more hawkish direction.


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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 acknowledgement of the source is prohibited.

See also:

26 Oct 2017 15:09

Afternoon analysis 26.10.2017

26 Oct 2017 11:27

Daily analysis 26.10.2017

25 Oct 2017 15:14

Afternoon analysis 25.10.2017

25 Oct 2017 12:01

Daily analysis 25.10.2017

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