Afternoon analysis 01.12.2015

, Autor:

Marcin Lipka

The euro rebounded from the lowest level since April. The common currency is waiting for the ECB's meeting. The zloty increased in the second part of the session in spite of weaker PMI index.

The euro returned from the lowest level since April. The common currency exploited better than expected data from the monetary union. The unemployment rate in Germany declined more than the forecast (by 13k against 6k that was expected) and the PMI index from the major European economy exceeded the expectations. Similarly, other reports from the European economies were better than it was expected.

In addition, the data on the labor market exceeded the forecast. The unemployment rate dropped to 10.7 percent from 10.8 percent in the previous month. The forecast was unchanged unemployment rate. The report showed that although the labor market performance is still not very good, there is some sign of improvement.

A stronger labor market increased the probability of the rebound of inflation as it will result in stronger consumption. On Wednesday report on inflation in the euro zone is scheduled. The forecast is 0.2 percent against 0.1 percent in the prior month. The core inflation rate is expected at 1.1 percent.

Tomorrow's data will be interesting in the context of the latest remarks from Mario Draghi. ECB President said at the beginning of November that the core inflation has shown signals of deterioration of the positive trend. Draghi's remarks has suggested that the inflation rate might have weakened in October. One can expect that the ECB will also cut its inflation rate forecast.

The probability that the euro rebound will be extended is rather limited. On Thursday the European Central Bank will decide on the interest rates. The Frankfurt-based institution is expected to provide additional stimulus (by increasing the QE program and cutting deposit rate). This factor will increase the pressure on the EUR/USD.

Janet Yellen's speech

Federal Reserve President Janet Yellen is scheduled to speak on Wednesday. She is expected to confirm the scenario of tightening monetary policy. The December Fed meeting is scheduled in two weeks. It is not very likely that the expectation will be altered in short term.

However, the report on the employment situation in the US will be more important. The forecast is for a 200k increase in the non-farming sector. Earlier the Fed members have said that even a lower reading will be enough to result in a lower unemployment rate. Moreover, the ADP report is scheduled tomorrow. The report is highly correlated with the government's employment data.

Currently, the probability of interest rate hike exceeds 70 percent (according to Bloomberg data).

Zloty little higher

The PMI index from the Polish industry did not meet the forecast. In November the gauge dropped to 52.1 from 52.2 in the prior month. The forecast was for 52.8. In spite of weaker than expected reading the overall picture of industry is rather positive. Orders and production increased steady. Moreover, the employment level increased for 28th month in a row.

Although the headline PMI reading was weaker that the forecast, it showed rather positive tendencies. Combined with the GDP report (that exceeded the forecast) the latest report were rather positive. This factor may support the zloty.

On Tuesday the zloty increased. The Polish currency gained against the dollar and the pound, however it has remained near the record low levels. The zloty dropped against the euro.

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