Afternoon analysis 06.11.2015:
The dollar gained on the labor market data. The reading paves the way for interest rate hike at the Federal Open Market Committee's meeting in December. The zloty and other emerging market currencies dropped after the data was released.
The report from the labour market situation in the US exceeded the forecast. Employment in non-farm sector increased 271k. It was more than the 185k that was expected. Employment increased 137k in the prior month (revised from 142k). It was the largest gain in the year.
Other readings were also very good. The unemployment rate dropped to 5 percent against 5.1 percent last time. The numbers on wages were also positive. It increased 0.4 percent on a monthly basis against the 0.2 percent that was expected. On a yearly basis it increased 2.5 percent.
October's report leaves no doubts on whether the US labor market expansion is strong enough. After the release it is very likely the Federal Open Market Committee will decide to raise the rates in December. In the last few days the Fed's members (including Fed Chair Janet Yellen) have conditioned the decision on tightening on the economic reports.
As a result, the probability of a hike increased to 72 percent (based on the futures market). The market's reaction was unambiguous. The dollar gained against the euro to the highest level since April. The US currency increased also against other major pairs.
In contrast, the euro was additionally pressured by the economic reports. Once again, the German reports missed the forecast. After weaker than expected reading on industrial orders today the report on production missed the forecast. Reports have shown that the emerging market slowdown has affected the German economy. If the tendency holds in the longer term, it may affect the region. Moreover, there is still possibility that the European Central Bank will decide to strengthen stimulation in December.
Pound exceeded decline
The British currency posted the second day of decline. On Thursday the Bank of England unexpectedly showed a dovish stance. The monetary authorities cut the outlook for inflation - a move that defers the interest rate hikes.
Today the pound declined due to weak report from industry. Production dropped 0.2 percent against the minus 0.1 percent that was expected. The British statistical office revised down the data on an international trade, which may drag the GDP growth further. As a result, the GBP/USD dropped to the lowest level since April. The move was exceeded after the US labor market data.
The zloty under pressure
The unemployment rate dropped to 9.6 percent in October, according to the labour ministry. It was the lowest level since December 2008. The report confirmed the view that the labor market remains strong in spite of weak reports in general.
However, the approaching tightening in the US will negatively affect the emerging market currencies. The tendency is going to hold in the medium term. The zloty will be affected. As a result, the probability of a wider rebound of the Polish currency is limited.
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