Afternoon analysis 02.12.2015

, Autor:

Marcin Lipka

The ADP report showed strong labor market. The euro dropped after the inflation data were published. No surprise from the MPC. The zloty rebounded against all its major pairs.

Two weeks before the key meeting of the Federal Open Market Committee the labor market data was very strong. The ADP reading showed 217k employment increase in private sector against the 190k that was forecast. Last month employment increased 196k (revised from 182k).

The employment growth was broad based. The largest gain was observed in service sector, but improvement in manufacturing was important signal given recent weak data from industry. Today's data suggested that the labor market data on Friday will be also very strong. A 200k increase in non-farming sector is expected.

The ADP report increased the probability that the December FOMC meeting will result in the interest rate hike. It would be the first hike in almost a decade. In the longer term this factor will support the dollar.

Fed Atlanta President Dennis Lockhart said today that hike is "compelling". After the European session Fed President Janet Yellen is scheduled to speak. Her speech will rather support the tightening scenario.

European inflation

Before the key meeting of the European Central Bank on Thursday the data on inflation supported the case for more stimulus. The Eurostat said that consumer inflation stood at 0.1 percent on a yearly basis. It missed the 0.2 percent that was forecast.

Moreover, core inflation data (that excludes volatile prices of food and energy) also missed the expectations. This measure dropped to 0.9 percent from 1.1 percent in the prior month. The forecast was for 1.1 percent inflation rate. Slowdown in inflation has been suggested by ECB President Mario Draghi at the beginning of November.

The ECB inflation goal is near 2 percent on a yearly basis. In the meantime, the inflation rate hovered slightly above the zero level in the last quarters. As a result, today's report give additional strong arguments for the European monetary authorities to provide more stimulus.

The ECB is expected to deliver an expansion of the QE program and lower deposit interest rates. Details in the ECB's decision will decide how the currency market will react. However, the probability that the Frankfurt-based institution will not provide additional measure is limited.

The EUR/USD dropped after the European and the US reports were released. The major currency pair gave away gains from Tuesday, when had gained due to weak ISM index reading.

A stronger zloty

As expected, the Monetary Policy Council left interest rates unchanged. The basis rate stood at 1.50 percent - the lowest level in history. Today's MPC meeting was last for Andrzej Bratkowski and Elzbieta Chojna-Duch. In January they will be replaced by new members named by the parliament.

The zloty posted two months of declines. In the October-November period the currency dropped about 6 percent against the dollar. Given the expected tightening in the US, it is not very likely the zloty would gain against the dollar in the medium term. On Wednesday the zloty gained. However, it is not very likely the move will be continued in the medium term.

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