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Daily analysis 03.11.2016

, author:

Bartosz Grejner

The Fed emphasized that inflation is increasing slightly faster, but it didn’t indicate the moment of rate hikes. Positive PMI from the British services sector, as well as the decision from the British court regarding Article 50 support the pound. The Polish currency is relatively stable after the FOMC announcement.

Relatively dovish Fed

Just as expected, the FOMC left interest rates unchanged. George and Mester yet again voted in favor of rate hikes, just as they did in September. However, Rosengren’s attitude was relatively surprising. He voted in favor of leaving interest rates unchanged, despite supporting the hikes in September.

The FOMC announcement was basically the same as that of September, with a few exceptions. Primarily, the Fed members emphasized that inflation has been increasing since the beginning of the year (despite remaining below its target), even though the majority of inflation expectations have not changed over the past few months. Secondly, the FOMC is aware that arguments in favor of rate hikes are becoming increasingly legitimate. However, the Fed members decided to leave interest rates unchanged in order to wait for further proof of the continuous progress of their goals.

The announcement had a limited impact on the dollar. The EUR/USD remained near 1.11. The probability of rate hikes in December, which is based on the Fed rate contracts, also remained the same as it was before the meeting (71.5%).

Positive information for pound

Reuters informed us that the British government lost the case regarding Article 50 of the Treaty of Lisbon in the British court. The court decided that the decisions regarding Article 50 must be voted on by Parliament. This may suggest that Brexit may be more transparent than expected. Moreover, it’s possible that Prime Minister Theresa May will give more details regarding her plan of leaving the EU. Today’s verdict is a decision from the The General Court (EGC). The summit of the constitutional court is scheduled for December 7th. The government will most likely file an appeal against today’s verdict.

At 10.30 AM, Markit/CIPS published the PMI data regarding the British services sector for October. The reading appeared to be higher than the consensus (54.5 vs 52.5), as well as the highest since January. The report shows that a weaker pound supported an increase in foreign demand. However, this also causes inflation pressure. Production factor prices quoted their largest increase since March 2011. Producers have transferred the weight onto consumers. Service fees increased at their largest pace since April 2011.

Chris Williamson, Markit senior economist warns that, “[the] progressive increase in prices causes a danger of limit in employment in companies, as well as limit in consumer expenses.” Due to positive PMI and the decision regarding the Article 50, the British currency gained more than 1% against the dollar. The GBP/USD was at its highest level since October 10th, and at noon it was slightly more than 1.24.

Slight changes on zloty after FOMC announcement and pound at 4.85

The zloty’s quotations were similar to what they were at yesterday’s closing. The dollar was within the range of 3.89 – 3.90, the euro was at the level of 4.32 and the franc remained above 4 PLN. The largest changes were observed on the pound. The British currency was gaining more than 1% against the zloty. Shortly before noon, the pound was at the level of 4.85. However, its value went down to 4.84 PLN after 12.00 AM.

We are expecting a few events that may impact the zloty today. At 13.00 (1.00 PM), we will know the decision from the Bank of England regarding interest rates and the QE program. This may increase volatility on the pound. At 15.00 (3.00 PM), the ISM will publish the data regarding the services sector. The market expectations are at the level of 56.0 and the reading from September was at the level of 57.1, which is definitely more than expected. If this index is significantly different than the consensus, we may expect large volatility on the dollar.

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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