Afternoon analysis 02.11.2017

The Bank of England is raising interest rates, but the overall message from the British monetary authorities is less hawkish than might have been expected and the pound is depreciating. The zloty's behaviour in the afternoon remained calm, excluding the movements on the GBP/PLN pair.

Interest rates up but pound down

The Bank of England increased the interest rate by 0.25 of a percentage point to 0.5% at its November meeting, in line with economists expectations. The decision was taken by votes, distributed at a ratio of 7:2. In the first seconds, it caused the sterling's appreciation. However, the GBP/USD increases quickly turned into strong drops of one percent.

The rapid weakening of the sterling may have been caused by the opinion that "more increases may be necessary than the market expects" being removed from the statement. Now, the Bank of England assumes (which was also confirmed at the conference) that interest rates will increase by 50 core points over the next three years.

Covering the BoE's expectations with only one increase in the market valuation seemed to be a dovish approach for the market participants, as a significant part of them expected to keep this passage.

Currently, by the end of 2018, however, the market alone expects growths of 26 basis points. Yesterday, it was 36 basis points (taking into account today's increase). The reaction at the level of the 10 basis points decreases in future interest rates, despite the current increase, well presented the market "disappointment" as to the pace of monetary tightening in the coming quarters.

In addition to the market's reaction and the removal of the passage on the difference between investors' expectations and monetary authorities' approach, it is worth drawing attention to a number of comments from Mark Carney on Brexit. The current monetary policy has clearly intended to support the economy during the time of transition following the EU exit. Without extraordinary market conditions, interest rates would probably have been raised more quickly.

There has been some kind of suggestion for investors. If the process of leaving the EU includes a long transition period which will allow for a smoother adjustment to new economic conditions, then the monetary policy may be more restrictive. However, if the negotiations with Brussels encounter more problems, the sterling may not only be under pressure due to economic uncertainty but also because the maintenance of interest rates at a low level.

Tax reform in the US and the zloty

In the afternoon, Bloomberg agency has announced that the Republicans will present a tax system reform plan for enterprises that will coincide with the original assumptions (CIT cut from 35 to 20 percent from 2018, rather than, as suggested in the last days, that the process would be spread over 5 years). This is a positive message for the dollar. Moreover, positive for the dollar was the, lower than estimated, new reading on initial jobless claims (229k vs 235k) and a strong productivity growth (from 1.5 to 3.0%, with a consensus of 2.6%).

Next few hours on the market should be subject to expectations regarding the election of a new Federal Reserve President and tax changes. If Jerome Powell's nomination scenario was fulfilled, and if a detailed plan to reduce the tax burden for enterprises and households that was in line with several months suggestions, then the sum of this information should be fundamentally favourable to the US dollar, although it is possible that a stronger response will be visible after tomorrow's data from the US Department of Labor.

As far as the zloty's situation is concerned, it has remained stable. The EUR/PLN pair moves in the range of 4.23-4.24. Much deeper changes are observed on the pound. Initially, the GBP/PLN rose to 4.83, to fall back to 4.76 PLN. The zloty, like other currencies in the global marketplace, is likely to wait for tomorrow's data from the US Department of Labor and for the dollar's final reaction.