Afternoon analysis 03.08.2017

The Bank of England left the monetary policy unchanged but the pound sustained some heavy losses. The Polish currency was stable, although GBP/PLN fell close to multi-year lows.

The pound’s value dropped

After the Monetary Policy Committee’s meeting, the Bank of England published today its decision regarding the monetary policy. Both the bond buying program and interest rates were left unchanged. Six members of the MPC opted to leave the rates at their current rate, whereas two of them voted in favour of one. Some market participants speculated that as much as three members could vote in favour of an increase – however, the probability of such a scenario was limited by the earlier June’s inflation reading.

Nonetheless, the British currency posted a considerable decline in value after the publication. The GBP/USD exchange rate fell from 1.324 to 1.312. That was probably also the result of a downward revision of GDP projections by the BoE: to 1.7% in 2017 (from 1.9%) and to 1.6% in 2018 (from 1.7%), on a yearly basis. Additionally, the average earnings growth rate saw a revision from 3.5% to 3% YOY in 2018.

Mark Carney, the Bank of England’s president, added that the projections take into account a “soft Brexit”. This could mean that any potential problems with negotiations between the United Kingdom and the European Union could weaken the pound. In the short term, however, the British currency could be susceptible to increase volatility, especially in reaction to future inflation readings or wage growth rate, as well as matters related to the Brexit process.

Zloty saw no substantial changes

The Polish currency was relatively stable today, perhaps apart from its relation to the pound. The GBP/PLN pair posted a sharp decline after BoE statement – it fell from approx. 4.758 to 4.713. Aside from the “flash crash” from the beginning of October, the lowest level of the GBP/PLN rate since the end of August 2011 was only 3 gr away.

In relation to other major currencies, there were no significant movements. The CHF/PLN pair traded close to the 3.70 level, which was close to recent lows, and EUR/PLN consolidated between 4.25 and 4.26, as in the previous days. The relation of the dollar to the zloty (USD/PLN) remained still under 3.59. Tomorrow’s labour market data could be important both for this pair and the US currency in particular. Should the data exceed expectations, and taking into account Tuesday’s inflation report, USD/PLN could move swiftly in the direction of 3.65 in such a scenario.

Tomorrow’s preview

The report on US labour market will be published on Friday. The Department of Labor’s report for the month of June is probably the most anticipated event this week. Tuesday’s better-than-expected US inflation data didn’t help the dollar. However, should the labour market report prove to exceed market expectations, coupled with the solid inflation reading, the dollar could see a solid gain in value.

We learned on Wednesday the increase in employment in the private nonfarm sector, which according to ADP, was 178k in July – a similar growth (180k) is expected in the case of the official Department of Labor data, which will be shown in the report. One has to remember that the correlation between ADP and DoL readings hasn’t been ideal – there have been some substantial differences in some recent months.

If the change in private employment happens to be close to the ADP reading (or even in the 150k – 200k range), the focus of the market could be mostly on the data regarding the average hourly earnings. A yearly growth rate of 2.6% (or more) could increase inflation expectations and ultimately strengthen the dollar. We could expect an inverse situation should the growth rate be 2.3% or less. However, a reading between 2.4% - 2.5%, with the rest of the report in line with market expectations, could slightly increase the dollar’s value (taking into account the Tuesday’s better-than-expected inflation data).