Afternoon analysis 17.11.2015:
The euro did not exploit a better than expected reading on the ZEW index. The pound gained on inflation data. The zloty under pressure of risk aversion.
The German investors improved their expectations concerning the outlook for the economy. The ZEW index increased to 10.4 against 1.9 in the previous month. The reading was better than the market consensus. It is the first increase in the last seven months.
Strong consumption in Germany, a weak euro that supports export and quite good performance of the US economy are the factors that supported the index. In the report there were no remarks concerning China and the slowdown in the emerging market economies.
The view presented in the ZEW report was similar to the one presented in the Bundesbank's monthly report. The German central bank also pointed at consumption as an engine of the economy. The monetary authorities see no important threat stemming from the situation in China and other emerging economies.
The latest reports limit the anxiety regarding the Chinese slowdown and its impact on the German economy. The share of German export to China is more than 6 percent. Although the level is quite significant, it is not enough to cause significant risk.
Nevertheless, the report did not support the euro. The common currency hit 1.0642 today. It was the lowest level since April.
Comments for the European Central Bank Chief Economist put pressure on the euro. Peter Praet said in an interview with Bloomberg that fulfilling the inflation target in the midterm is not very likely and the ECB will consider additional measures at the next meeting. A similar dovish stance has been presented by Ewald Nowotny.
Inflation in the US was in line with the forecast. Consumer prices increased 0.2 percent on a monthly basis. The core inflation rate increased by the same amount. The report did not influence the currency market.
The data on inflation in the UK supported the pound. Although the consumer prices growth was in line with the forecast (minus 0.1 percent year on year) the core inflation rate (that excludes volatile prices of food and energy) increased to 1.1 percent from 1 percent in the prior month.
The inflation rate in the UK has been near the zero level in the last three quarters. The situation supports the purchasing power of consumers, a situation positive for the economy. Moreover, increase in core inflation shows that the environment of low prices is due to low energy and food prices. As consumption rises, rebound in inflation is getting more possible.
Zloty under pressure
On Wednesday, the data from the Polish labor market are scheduled. Wage increases are expected at 3.6 percent and employment is expected to increase 1 percent. The report will not alter the expectations for interest rates, thus it will not affect the zloty in the short term. However, in the longer term, current labor market developments support the case for tightening the monetary policy. In the next few days, data on retail sales and industrial production is expected.
The zloty declined. The Polish currency dropped against all its major pairs. The pound increased above 6.05 - the highest level since mid 2005. The dollar exceeded the 3.98 level and was at the highest level in 11 years.
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