Lower than expected inflation from the eurozone increased fluctuations on the EUR/USD pair. Further pound depreciation following reports of possible solutions to another argumentative issue between London and Brussels. An unsuccessful attempt from the EUR/PLN to drop below the 4.20 level. Polish GDP reading for Q3 better than initial estimates, but the structure may suggest a slowdown in growth pace.
The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.
2:00 pm: Consumer inflation (CPI) in Poland for November (estimates: 0.3% MOM and 2.3% YOY),
2:30 pm: Income and spending in the US for October (estimate: 0.3% MOM in both cases),
2:30 pm: PCE inflation from the USA for October (estimates: 0.1% MOM and 1.5% YOY; excluding fuel and food prices, 0.2% MOM and 1.4% YOY),
2:30 pm: Weekly data on initial jobless claims in the USA (estimate: 240k).
No inflationary pressure in the eurozone
Yesterday evening, the EUR/USD pared a significant part of the losses recorded during the European part of the session. This was probably due to several factors, but none of them was particularly important. The structure of GDP growth in the USA was not impressive (2/3 of investment contributions were stocks). The statements by Federation Reserve President Janet Yellen also confirmed that the Fed was surprised by the limited inflationary pressure this year.
Yesterday's reports of tax system changes in the US could also be an important hazy element for the market. There was an idea among Republican senators to cut the reduction scale of fiscal burdens for companies (from 35 to 21-22% vs. 20% previously discussed). However, it seems that the differences in opinion among Congress's upper chamber members are not fundamental enough to halt the vote, which may even take place today. It seems more important to reach a consensus among chambers, where one of the most important differences is the deadline for implementation CIT cuts. However, this will probably not be discussed until next week.
Maintaining the relatively high level of the EUR/USD pair (about 1.1870) after the start of the European session posed serious problems quite quickly. Retail sales in Germany dropped by 1.4% YOY instead of increasing by 2.8% YOY (estimated by economists). After 11:00 am, surprisingly low core inflation readings from the eurozone also were published. It amounted to 0.9% YOY in November, with the expectation at 1.0%. Additionally, yesterday's readings on changes in service prices in Germany significantly accelerated and suggested that today's publication may even exceed expectations. As a result the EUR/USD quotations fluctuated close to the 1.1820 boundary by midday.
In the context of the main currency pair, today's readings of the PCE core inflation from the USA will also be important. This index is used by the Fed in its macroeconomic projections. The economists' consensus indicates growth at the 1.4 YOY level. It seems that if it exceeds this value by 0.1 percent it may cause a decrease in the EUR/USD pair, especially when today's data from the eurozone supported the concept of no pressure on prices in the single currency area.
More positive information for the pound
After Monday's report from the British press about the considerable agreement regarding Brussels and London's positions on the Brexit Bill, the British currency received a further stimulus for increases. The Times wrote that the UK is also increasingly close to an agreement with the EU on the land border between Ireland and the Great Britain (Northern Ireland).
This suggests that the negotiations are moving faster than expected, so it is possible that the agreement on disputed issues related to the "divorce" may be reached in mid-December. This would open the possibility of negotiations on a transitional period, as well as on future trade relations between the United Kingdom and the European Union. This Monday, PM May and Head of the European Commission Juncker will meet. Meetings of the main negotiators from both sides are also scheduled for the beginning of the week. The rising chances of a "mild Brexit" should continue to support the pound.
GDP's highs already behind us
In the morning, as well as during Wednesday's sessions, there was an attempt to depreciate the EUR/PLN below the 4.20 boundary. As of yesterday it was not successful and the euro's quotations returned above this level. A detailed publication of the GDP reading for Q3 was also in the morning. Economic growth reached 4.9% YOY and was 0.2pps above the preliminary estimates.
However, the growth structure may be bothersome and suggests that much weaker results will be expected in subsequent quarters. Investment expenditures are still very low (only 2.7% YOY increase - the contribution of only 0.6 percentage points, with a drop last year of 7.2%). The pace of consumption growth in the household sector is unlikely to accelerate further (the growth rate of about 5% has been maintained for three quarters) because the impact of social programs should fade and the repetition of strong employment growth from the last quarters will be very difficult to achieve again.
At first glance, we can enjoy a positive contribution from the export side (a contribution of 1.1 percent to the whole reading). However, it is practically impossible to maintain such a result in the long term. A zero contribution would be a success, especially considering that there still is relatively strong growth in consumption or the investments' restoration. Therefore, this positive factor should fade quickly. This past quarter is also the first in more than a year where stocks have no influence on reading. This may mean that they will stop contributing positively to the final reading as it was in 2016 (thanks to that the GDP was higher by 1.2 percentage points) and in the first two quarters of 2017 (0.7 percentage points and 1.9 percentage points, respectively).
After the published GDP data, the zloty started to decline. It is difficult to say whether it was the result of the composition of rather negative components or whether it was the result of an unsuccessful attempt of the EUR/PLN pair to drop below the 4.20 boundary. Afternoon data from the USA will be important for the Polish currency. If core inflation in the US exceeds economist estimates, then the dollar may continue to increase, which will probably have a negative impact on the overall zloty valuation.
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.
Lower than expected inflation from the eurozone increased fluctuations on the EUR/USD pair. Further pound depreciation following reports of possible solutions to another argumentative issue between London and Brussels. An unsuccessful attempt from the EUR/PLN to drop below the 4.20 level. Polish GDP reading for Q3 better than initial estimates, but the structure may suggest a slowdown in growth pace.
The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.
No inflationary pressure in the eurozone
Yesterday evening, the EUR/USD pared a significant part of the losses recorded during the European part of the session. This was probably due to several factors, but none of them was particularly important. The structure of GDP growth in the USA was not impressive (2/3 of investment contributions were stocks). The statements by Federation Reserve President Janet Yellen also confirmed that the Fed was surprised by the limited inflationary pressure this year.
Yesterday's reports of tax system changes in the US could also be an important hazy element for the market. There was an idea among Republican senators to cut the reduction scale of fiscal burdens for companies (from 35 to 21-22% vs. 20% previously discussed). However, it seems that the differences in opinion among Congress's upper chamber members are not fundamental enough to halt the vote, which may even take place today. It seems more important to reach a consensus among chambers, where one of the most important differences is the deadline for implementation CIT cuts. However, this will probably not be discussed until next week.
Maintaining the relatively high level of the EUR/USD pair (about 1.1870) after the start of the European session posed serious problems quite quickly. Retail sales in Germany dropped by 1.4% YOY instead of increasing by 2.8% YOY (estimated by economists). After 11:00 am, surprisingly low core inflation readings from the eurozone also were published. It amounted to 0.9% YOY in November, with the expectation at 1.0%. Additionally, yesterday's readings on changes in service prices in Germany significantly accelerated and suggested that today's publication may even exceed expectations. As a result the EUR/USD quotations fluctuated close to the 1.1820 boundary by midday.
In the context of the main currency pair, today's readings of the PCE core inflation from the USA will also be important. This index is used by the Fed in its macroeconomic projections. The economists' consensus indicates growth at the 1.4 YOY level. It seems that if it exceeds this value by 0.1 percent it may cause a decrease in the EUR/USD pair, especially when today's data from the eurozone supported the concept of no pressure on prices in the single currency area.
More positive information for the pound
After Monday's report from the British press about the considerable agreement regarding Brussels and London's positions on the Brexit Bill, the British currency received a further stimulus for increases. The Times wrote that the UK is also increasingly close to an agreement with the EU on the land border between Ireland and the Great Britain (Northern Ireland).
This suggests that the negotiations are moving faster than expected, so it is possible that the agreement on disputed issues related to the "divorce" may be reached in mid-December. This would open the possibility of negotiations on a transitional period, as well as on future trade relations between the United Kingdom and the European Union. This Monday, PM May and Head of the European Commission Juncker will meet. Meetings of the main negotiators from both sides are also scheduled for the beginning of the week. The rising chances of a "mild Brexit" should continue to support the pound.
GDP's highs already behind us
In the morning, as well as during Wednesday's sessions, there was an attempt to depreciate the EUR/PLN below the 4.20 boundary. As of yesterday it was not successful and the euro's quotations returned above this level. A detailed publication of the GDP reading for Q3 was also in the morning. Economic growth reached 4.9% YOY and was 0.2pps above the preliminary estimates.
However, the growth structure may be bothersome and suggests that much weaker results will be expected in subsequent quarters. Investment expenditures are still very low (only 2.7% YOY increase - the contribution of only 0.6 percentage points, with a drop last year of 7.2%). The pace of consumption growth in the household sector is unlikely to accelerate further (the growth rate of about 5% has been maintained for three quarters) because the impact of social programs should fade and the repetition of strong employment growth from the last quarters will be very difficult to achieve again.
At first glance, we can enjoy a positive contribution from the export side (a contribution of 1.1 percent to the whole reading). However, it is practically impossible to maintain such a result in the long term. A zero contribution would be a success, especially considering that there still is relatively strong growth in consumption or the investments' restoration. Therefore, this positive factor should fade quickly. This past quarter is also the first in more than a year where stocks have no influence on reading. This may mean that they will stop contributing positively to the final reading as it was in 2016 (thanks to that the GDP was higher by 1.2 percentage points) and in the first two quarters of 2017 (0.7 percentage points and 1.9 percentage points, respectively).
After the published GDP data, the zloty started to decline. It is difficult to say whether it was the result of the composition of rather negative components or whether it was the result of an unsuccessful attempt of the EUR/PLN pair to drop below the 4.20 boundary. Afternoon data from the USA will be important for the Polish currency. If core inflation in the US exceeds economist estimates, then the dollar may continue to increase, which will probably have a negative impact on the overall zloty valuation.
See also:
Afternoon analysis 29.11.2017
Daily analysis 29.11.2017
Afternoon analysis 28.11.2017
Daily analysis 28.11.2017
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