Limited fluctuations in the market (Afternoon analysis 5.11.2018)

EUR/USD oscillates around 1.14 - investors are expecting Tuesday's elections, when the volatility may increase slightly. The lack of dollar appreciation helps the zloty to maintain Friday's levels against the main currencies, but the weakening may already occur on Wednesday.

Will MPC be dovish?

The new week started relatively calmly on the currency market. Although the dollar was appreciating, the changes were limited. The main currency pair, i.e. the euro/dollar (EUR/USD), fell slightly below the 1.14 boundary and the lack of significant fluctuations of the currency pair and lack of deviation from the closing level on Friday also contributed to the zloty’s stabilisation.

The EUR/PLN exchange rate oscillated around 4.31, and the USD/PLN exchange rate oscillated around 3.78 - 3.79, which is also relatively close to the reference rates quoted at the end of last week. Significant changes are not expected by the end of the day, as relatively good sentiment on the equity market combined with small movements of the main currency pair suggests stabilisation around current levels.

ISM will publish PMI data for the US services sector in October at 4:00 p.m. The median of market expectations indicates a slight decrease from 65.2 points to 64.5 points. In the case of this reading, it would have to decrease by several points in order to cause dollar weakening.

However, the significant weakening seems to be limited, especially as the September level was the highest in more than 15 years. It should be remembered that the US economy is growing faster than expected by economists, which also reduces the probability of significant declines in the ISM index.

As a result, the rest of the trading day on the currency market should be similar to the first part of the day. The market's attention may be focused on tomorrow's elections in the USA, although current surveys suggest that the election result will have a rather limited impact on the dollar, and indirectly on the zloty.

However, the latter may come under pressure on Wednesday, when the Monetary Policy Council's statement after the two-day meeting will be published, as well as a press conference with the participation of its President will be held. The MPC has rather many more reasons (e.g. weaker than expected data from the country, the eurozone, problems of Italy, monetary tightening in the USA, drop in oil prices) to soften its position and postpone the increase in interest rates even further. The Council is unlikely to raise interest rates until the European Central Bank has done so, and the prospect of this is less and less probable with virtually every publication of the growth pace and inflation from the eurozone.

Tomorrow's preview

At 8:00 a.m. the Federal Statistics Office (Destatis) will publish data on orders in the industrial sector in September. The median of expectations points to a decrease of 0.6% on a monthly basis, compared to an increase of 2.0% in August. However, the data fluctuates considerably from month to month and often clearly deviates from consensus. The renewed weakening of the euro, which is still insignificant, may increase slightly, if the order data for Europe's largest economy disappoints market expectations.

Until 10:00 a.m. the second reading of the eurozone's PMI from IHS Markit will also be published. However, as this is the next publication in the same month, the risk of significant deviation from the initial data is very limited. The impact on the currency market should be similarly reduced.

Congressional elections in the USA will be an important event. For the dollar, the most favourable result would be that both the Senate and the House of Representatives would be taken over by the Republican party, as this may mean further fiscal stimulation (e.g. tax cuts) and, as a result, the need for higher interest rates. The opposite scenario, i.e. the full takeover of power by the Democrats, may, in turn, weaken the dollar - such a result could lead to a potential conflict with the White House, a less stimulative fiscal policy and a softening of relations with China.

According to FiveThrityEight forecasts, the House of Representatives will be maintained by the Democrats and the Senate by the Republicans. The dollar may depreciate slightly with such a result, although the potential decline in value is limited because it is currently the most probable result (so most of it is already valued in the dollar).