US data fails (Afternoon analysis 7.12.2018)

The market waited patiently for a report from the US labour market. However, the data failed in the case of an increase in the pace of wages growth (monthly) and the number of new payrolls. The zloty remains stable, but fluctuations may increase significantly next week, just like in the case of most of the main currencies.

EUR/USD increases but slightly

Quotations during the day moved within a minimal fluctuation range. Investors were waiting for the November labour market data from the USA. However, the report published at 2:30 p.m. by the Department of Labour failed to meet expectations on important issues. Although the annual average wage increase amounted to 3.1% per year, as expected, the monthly reading already gave some reason for concern.

On a monthly basis, the increase was 0.2%, although the reading was expected to reach 0.3. Additionally, October's monthly increase from 0.2% to 0.1% was revised downward. The data may suggest that the growth pace may slow down slightly in the following months. On top of that, the employment growth in the non-farm sector turned out to be lower than the market consensus (by 43,000), amounting to 155,000. The increase in the number of full-time jobs was basically in the range of readings from the last year, but in the context of weaker wage data, this translated into an additional negative impact of today's report.

As a result, the main currency pair's (EUR/USD) quotations rose sharply from around 1.136 to nearly 1.142. Within half an hour, the dollar started to pare losses, practically returning to its initial level. The OPEC delegates' announced that an agreement would be reached, and oil production cuts will amount to 1.2 million barrels a day, which could have strengthened the dollar. As a result, oil prices, both WTI and Brent, rose by more than 4 % after 3:00 p.m.

Ultimately, today's data was not positive for the dollar, which may remain weakened till the end of the day. Significant increases in EUR/USD quotations are unlikely. The euro was also not supported by macroeconomic data today, GDP growth in the eurozone turned out to be below estimates, and the components were weak (growth was mainly due to stocks).

No major changes in the EUR/USD quotations support the maintenance of the zloty's current valuations in relation to the main currencies. The EUR/PLN rate moved slightly above 4.28, and the USD/PLN rate was in the range of 3.76-3.77. These are marginal changes compared to yesterday's closing rates, similarly as in the case of the CHF/PLN rate. The pound versus zloty was in the range of about 4.80-4.82. However, this may change at the beginning of next week.

Next week's preview

Next week will be rich in events affecting the foreign exchange market; therefore significant fluctuations can be expected, potentially much greater than this week.

On Monday before midday (10:30 a.m.), important data from the British economy will be published. Although Brexit will continue to influence the pound, Monday's industrial and construction data, GDP growth pace and foreign trade balance could significantly increase the pound's volatility around the time of their publication. However, the final impact does not necessarily have to be extensive given how significant influence on the British currency (in the worst case scenario the Bank of England assumed in the last report a 25% depreciation of the pound) has the form of Brexit.

On Tuesday, data will be published on the change in the average wage of British people, which is important in the context of inflation and expectations about the future level of interest rates. The key event on Tuesday will be the vote in the British Parliament on the agreement reached by Prime Minister Theresa May. It will most likely be rejected, but we can expect large fluctuations in the pound's quotations. The final impact on the pound is also not entirely clear, as it opens the way to very close relations with the EU (following the example of Norway), a second referendum on leaving the EU or a hard Brexit.

On Wednesday, data from the USA will determine the market. In the afternoon, the level of consumer inflation (CPI) in November will be published, in the evening (European time) the chairman of the Federal Reserve, Jerome Powell, will testify before the congress committee. The market will be watching his words very carefully. It will surely be more detailed than his previous statement, and if there are hawkish comments from the Federal Reserve Head, the dollar may gain significantly, especially when combined with a convergent (or higher) market consensus reading of core inflation (2.2% y/y).

Thursday will be owned by the Swiss (SNB) and the European Central Bank (ECB). Both will certainly keep interest rates unchanged, but the latter has fewer arguments for a slightly hawkish tone. Fluctuations, particularly in the case of the euro, may increase, although it is more likely that the franc may appreciate and the euro weaken somewhat, although sentiment on the broad market will also be important (whether we will observe an increased aversion to risk).

On Friday, the preliminary data of the PMI indexes of manufacturing and services sectors for the eurozone will be published. The data may be rather important. In the context of the last few months, activity in these sectors has fallen sharply, especially in the case of industry. Readings in November were slightly above expectations, but still at relatively low levels. Given the market situation and the fact that these indexes are based on the results of logistics managers' surveys, no significant increases can be expected. It will be important how PMI will fit into the general sentiment, determined by the events mentioned above from previous days. Weak PMI could, however, deteriorate sentiment a little, arouse fears of weaker than expected development of the eurozone and cause supply pressure on the common currency.