What influences exchange rates: politics or economy? [THIS WEEK ON THE MARKET]

Sep 25, 2017 10:19 AM|Conotoxia.com

The first hours of Monday's trading on the markets are spent on the assessment of the results in Germany and Moody's decision to downgrade the UK's rating. However, in the following days, it is likely that currencies will depend more on central banks' statements and macroeconomic data than on political events- writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

Just after the currency market's opening on Sunday evening, we had to deal with the euro's weakening and the appreciation of the franc. This was in response to the outcome of the German Parliament elections. Slightly worse than estimates were the results of the current CDU/SPD coalition, and the good outcome of eurosceptic AFD led to a decrease in the EUR/USD or the EUR/CHF.

However, it is worth noting, that the election's result to the Bundestag does not differ significantly from the last polls. It also seems that the change from the current "Great Coalition" to "Jamaican" (CDU/FDP/Green) probably does not change Germany's approach to the economy and European integration dramatically. Investors are also likely to find out quickly that there is less chance for a final round of talks on the formation of a coalition in Lower Saxony before the elections on October, 15th. As a result, the topic of the German elections should give way to economic data from leading economies and the statements of dominant central bank's representatives.

UK credit ranking downgraded

Friday's speech from Theresa May in Florence did not clearly change the situation on the pound. The British PM avoided mentioning the specific amount of contributions that the UK will pay into the EU budget during the transitional period between the theoretical exiting from the European Union and the actual departure from the common market.

One surprise in the context of the GDP was Moody's decision to downgrade the UK rating from Aa1 to Aa2. The agency pointed out above all that the situation of public finances "has clearly weakened". Debt to GDP is expected to reach 93% GDP in 2019. In addition, Moody expects the British economy to grow only 1% in the coming year.

After this information, the sterling clearly lost value. The GBP/USD pair fell from 1.3530 to 1.3450. The movement was also relatively strong in relation to the zloty and caused the pound's depreciation to approx. 4.80.

After the start of Monday's trade there has been a return to the levels prior to Moody's decision, but downgrading the rating may cause that the last pound's upward trend to slow down even if the prospect of rate hikes or relatively good macroeconomic data is maintained.

Central banks, inflation and the zloty

This week will be full of speeches by the representatives of the leading central banks. Several speeches of the Federal Reserve representatives are planned. What is important, on Tuesday, Janet Yellen (President of Fed) will talk about monetary policy.

After September's meeting of the US monetary authorities, it can be seen that the Central Bank does not intend to withdraw from the 1 percentage point rate hikes. This view is likely to be maintained in the coming days. This should be an element that supports the dollar.

No fewer speeches are also planned from the ECB's representatives. In this case, statements from central banks may not be clear. On the one hand, we will probably hear about the relatively good condition of the eurozone economy, but on the other hand, we will also hear about the continued need for support from mild monetary conditions. As a result, the overall effect of the speech should, therefore, be neutral for the euro.

Of the macroeconomic data, the most important factor should be that concerning the preliminary September inflation data. On Thursday, readings will come from Germany and on Friday from the entire eurozone. The most interesting data are the readings of core inflation from the common currency area. Exceeding forecasts by 1.2% YOY, so reaching new 4-year highs should support the euro.

For the domestic market, as for the eurozone, September's inflation readings will be the most important. The preliminary reading of consumer price change for September will be published by GUS on Friday, at 2 p.m. Exceeding the consensus at a 2.0% level YOY should support the zloty and suggest that the fastest wage rise for more than five years (6.6% YOY in August) translates into higher prices. If inflation figures are in line with the expectations of most economists, the overall situation of the zloty should not change dramatically compared to what we are currently observing.


Sep 25, 2017 10:19 AM|Conotoxia.com

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