Afternoon analysis 04.02.2016

The BoE further from the hike but the MPC was less dovish than some might had expected. Economic projections from European Commission for the EU. According to the EC the general government balance is expected to hit minus 3.4% of the GDP.

The BoE decision

The market situation on the British currency was disturbed by the Bank of England (BoE) meeting. Just after the MPC statement hit the wire the GBP/USD dropped 70 pips falling to around 1.4530. The loss, however, was quickly reversed and the cable returned to around 1.4600.

The main reason which pushed the pound lower was different vote composition inside the council. During several previous meetings Ian McCafferty voted on the interest rates hike. Today he decided to support the “no change” camp and the decision to keep the benchmark unchanged was unanimous.

In contrast, during the conference governor Carney was asked whether there had been discussion on lowering the rates during the meeting. The question was justified do to the fact that according to Bloomberg calculations the probability for a reduction is higher than for a hike.

Carney, however, said that all members believe that another move would be rising the benchmark. It pushed the pound higher. Regarding the pound the incoming UK referendum whether to remain within the EU can be really important. Investors were nervous when there was a risk of Scotland leaving the UK structure. It is possible that the period of higher pound volatility can be repeated.

European Commission projections for the UE

New economic projections were published today by the European Commission (EC). It was worth noting that the EC revised 2016 inflation for the eurozone. Both in November EC and December ECB projections the HICP was expected to hit 1.0% in 2016. Now the inflation is supposed to hit only 0.5% this year. It may also suggest that in March the ECB will also update the forecast and use it as an excuse to loosen further the monetary policy.

Some changes regarding projections were published regarding Poland. The inflation this year is expected to hit only 0.6% this year while in November it was suppose to hit 1.4% in 2016. The GDP growth should remain at 3.5% in the following years. The EC, however, revised upwards the general government deficit from 2.8% to 3.4% of the GDP for 2017.

The EC also writes that “the debt projections for Poland are subject to a considerable degree of uncertainty because of the potential impact of exchange rate fluctuations on the relatively high share of sovereign debt denominated in foreign currencies.

Both regarding the zloty and the EUR/USD it is worth noting that tomorrow the BLS is expected to publish January payrolls. After the ADP reading the market is seeking around 200k number. A slide toward 150k and below may push the dollar low and bring the USD/PLN even to 3.90. Other PLN pairs should be fairly stable after the US readings.