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Afternoon analysis 01.09.2014

1 Sept 2014 16:55|Artur Wiszniewski

The eurozone data had no significant impact on the euro. The zloty was little changed after the drop of the PMI. The pound fell slightly after poor manufacturing data.

The European manufacturing sector slipped. The broad PMI for eurozone stood at 50.7, lower than 51.8 in the previous month – Markit Economics said today. The result was below expectations of 50.8. But there are darker and brighter spots in the eurozone.

Ireland is currently keeping ahead of the other countries with its economic performance. The PMI jumped to 57.3 – the highest level in 176 months (since 1999). In turn, the data from the three most important European economies were disappointing – Germany was stricken by slowdown (the PMI fell to 51.4 from 52.4 and 52 flash estimate), as well as Italy (the PMI dropped under neutral 50 to 49.8) and France (the sharpest drop since May 2013).

This weak data strengthens the case for the European Central Bank to introduce more measures to support the economy. The ECB President Mario Draghi, in his last public speech at the symposium in Jackson Hole, fueled expectations for quantitative easing in the monetary union. In addition, ECB President Draghi urged European lawmakers to shift the austerity-oriented policy to a more growth-supportive stance.

The outlook sketched by the ECB chief has been supported by countries like France and Italy, which are reluctant to austerity measures. Paris won't meet its goal to keep the deficit under 4 percent of GDP this year, so the French government is hoping to get support from monetary policy tools. Moreover, Italy has slipped into its third recession since 2008.

The European Central Bank will hold its monthly meeting on Thursday. The ECB is expected to leave main interest rates unchanged. The main refinancing rate will remain at 0.15 percent and deposit rate at minus 0.1 percent, in accordance with market expectations.

But what’s most important about Thursday's event has to be the Mario Draghi's press conference. The ECB President may deliver some hints about the outlook for private debt purchases in his speech at the symposium in Jackson Hole. However, the circumstances for additional measures are difficult due to Germany's defiance. Thus, the ECB may be more cautious in signaling a more accommodative stance than implied from Draghi's speech. This situation will benefit the euro.

The volatility in the market is subdued due to the absence of U.S. investors because of Labor Day celebrations.

In the afternoon the euro fell modestly against the dollar to 1.3134. Earlier today, the euro reached the lowest level in almost a year.

The British slip

The United Kingdom PMI was also disappointing. The gauge fell to 52.5 from 54.8 last month, lower than 55.1 predicted. That was the lowest result in the last 14 months. The drop of the index was caused by the worsening of the sub-indexes of output and new orders. In turn, it is worth noting that employment sub-index maintained its increase. All in all, the report from Markit and CIPS showed cooling in the British industry.

The British data may delay the moment of increase of interest rates in the U.K. The Bank of England was viewed as the first main central bank to raise interest rates after the crisis. But the perception changed after BOE President Mark Carney said that leaving accommodative policy will be determined by developments in the labor market (especially wage growth). That resulted in a drop in the British currency.

The GBP/USD fell after the data was showed but later it recouped earlier gains to 1.6623.

Little changes for the zloty

The zloty saw little movement after weak PMI. The gauge fell lower than expected, to 49 from 49.4. The PMI moved away from the neutral level of 50, indicating further cooling in the manufacturing sector.

The recent data from Poland show the faltering of economic growth. In addition, the Ukrainian crisis is worsening. The Russian troops entered  Ukrainian soil and supported seizing swaths of territory in the eastern part of the country. This week the European Union are likely to decide to impose additional sanctions on Russia. The restrictions will hurt the Polish exports to Russia and increase headwinds for GDP growth.

Given these circumstances the Monetary Policy Council will have to consider the appropriate moment for lowering the interest rates. Today, the question is not about whether it will happen, but when.. The Polish MPC will announce its decision on Wednesday. Although, the MPC is expected to leave the cost of credit unchanged in September, it may provide some hints about the timing. The MPC statement will probably weaken the zloty.

In the afternoon the zloty fell slightly to the major pairs. The euro rose to 4.205 and the dollar went up to 3.201. The franc rose to 3.483 and the pound went to 5.322.


1 Sept 2014 16:55|Artur Wiszniewski

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 acknowledgement of the source is prohibited.

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