Afternoon analysis 15.09.2016:
The Bank of England left interest rates unchanged. Retail sales from the USA appeared to be worse than expected and increase fluctuations of exchange rates. The zloty strengthened in hte second part of the day.
No changes in British monetary policy
The Bank of England didn't change its monetary policy. Main interest rate is at the 0.25% level, corporate bonds purchase is at the level of 10 billion pounds and the UK treasury bonds purchase is at the level of 435 billion pounds. The MPC members were unanimous regarding each of these three indexes.
In the BoE announcement we can see a slowdown of economic growth in the second half of 2016 that was lower than it has initially been assumed in August. This change is related to an excessive negative reaction of consumers sentiment, as well as of the PMI. This was cause by the Brexit referendum. In the BoE's opinion, the consumers sentiment is better than expected. Moreover, perspectives of the real estate market are improving and better indexes of the British economy have appeared over the past month. Additionally, inflation forecasts remain unchanged. Its increase to its 2% target is estimated for the first half of 2017 (inflation is currently at the 0.6% level).
The announcement gives a clear message to the markets. It states that the economic situation of the UK is not much worse than expected and that its consistent with forecasts made after the referendum. It's very likely that the BoE is preparing investors for the lack of monetary easing at the MPC meeting in November as well, especially taking into consideration today's announcement. By November we will know more indexes regarding the British economy that are significant for the MPC members. This is because they will include Brexit effects to a larger degree. The BoE has probably overestimated negative impact of Brexit. If the economic data does not deteriorate before the meeting in November, the chances for monetary easing will clearly decrease.
Worse sentiments in USA
The afternoon data from the USA appeared to be worse than expected. The retail sales data (excluding cars) for August was probably the most important. It went down to negative 0.4% (from negative 0.3%) in comparison to previous month. This reading will probably decrease chances for rate hikes in September, as well as wear-off the dollar. Data regarding producers inflation, as well as industrial production emphasized a negative picture of the American economy. Both indexes were worse than expected, which will probably strengthen the view that the Fed will leave interest rates unchanged.
However, jobless claims data appeared to be positive and has been reduces to 259k. This appeared to be a minor improvement in comparison to last week (260k). Jobless claims data visibly impact stock market quotations, as well as the dollar exchange rate. However, a minor change as this should not be crucial. The Fed index went up to 12.8 (consensus was 1.0). This is its highest result since February. Nevertheless, the above mentioned retail sales data will have a final impact on the dollar by taking it closer to 1.13 on the EUR/USD. Today's data from the American economy has strengthened the market's volatility, probably for the rest of the day..
Zloty continues its strengthening from yesterday
The zloty continued to strengthen against the main currencies, just as it did yesterday. It's likely that investors continue to benefit from the decision from Moody's, what was previously disabled by a weak global sentiment. Today, the zloty has additionally been supported by information from the foreign economies. The EUR/PLN reached the 4.32 level. If this trend continues, the pair should reach the 4.30 level, which is our base case scenario. Previously mentioned worse data from the American economy should support the zloty, at least until the Fed meeting on September 21st.
Tomorrow, the markets will most probably continue to react on the Bank of England announcement regarding the monetary policy from today. The American data will be the most important for the market.
Very important data regarding the American consumers inflation will be revealed at 14.30 (2.30 PM). Investors will focus on these readings mainly in the context of the decision from the Federal Reserve regarding interest rates, which will be made on September 21st. The core CPI will be the most significant out of tomorrow's data. It will not contain components related to energy or food, which are very volatile. The market consensus assumes a 0.2% monthly growth in August (0.1% in July). Even though the market estimates that inflation will reach zero, the reading at 0.3% level may be interpreted by the market as a potential argument for raising the main interest rate by the Fed. This would probably strengthen the dollar.
At 16.00 (4.00 PM), we will know the current sentiment of the American consumers. This data is significant for the markets, because it shows consumers' thoughts on the current economic condition, as well as own financial condition. This may determine the future behavior of the markets. Estimations show a 90.8 points reading, against the result of 89.8 that was achieved in August. If consumers sentiment goes above estimated level, the dollar may strengthen. This is because consumers' expenses are more than 2/3 of the entire American economy and a stronger sentiment usually suggests a stronger economy. We need to keep in mind that imminence of the Fed decision regarding interest rates (September 21st) causes stronger reactions of the market on the data that potentially may impact interest rates in the future.
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