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Afternoon analysis 12.09.2017

12 Sept 2017 15:33|Bartosz Grejner

Core inflation below expectations, stronger dollar and pound, the European Commission's proceedings against Poland - the zloty was under noticeable pressure in the afternoon. In turn, after surprising inflation data, the pound's value expressed in the dollar has risen to its highest level in a year.

Zloty under pressure

The zloty clearly lost value against the main currencies today. In relation to the pound, its depreciation was mainly due to the globally better condition of the first in relation to higher than expected inflation reading in the UK. The GBP/PLN pair rose to the level of approx. 4.75, the highest since August 3rd. The Polish currency also lost to the dollar, which gained in the broader market today (though not as much as the pound).

In the afternoon, some information appeared to additionally weaken the zloty. The National Bank of Poland (NBP) released August's data on core inflation (excluding energy and food prices), which was 0.7 percentage point - lower than expected by 0.1 percentage point. It was also the lowest reading on core inflation since March.

Later on, came news to the markets that the European Commission initiated the second step of the procedure regarding the courts issue in Poland. This resulted in the weakening of the zloty, which in relation to the euro lost more than 2 gr compared to the levels observed during the early trading hours today. The EUR/PLN exchange rate rose to approx. 4.27 level - the highest in two weeks.

In turn, the franc's rate in relation to the zloty was relatively stable - the CHF/PLN pair was close to 4.72, similar to yesterday’s trading. However, the absence of growth on this pair was mainly a result of the globally weaker franc, which has lost value in relation to, i.e. better market sentiment and a greater appetite for riskier assets.

If we observe further improvement of market sentiment, especially the rise of the US stock indexes and the yields on US Treasury bonds, the zloty could remain under pressure given the unfavourable factors that appeared at the same time (the stronger dollar, appreciation of the pound, lower than expected core inflation, EC proceedings).

Pound has appreciated significantly

The continuation of good sentiment on the market and much better than expected UK data on inflation made the British currency a subject to significant appreciation today. In relation to the euro, it gained nearly 1% - the EUR/GBP pair for the first time in more than a month was traded below 0.9.

The euro has been relatively strong despite the pound's appreciation. The dollar, in the context of last month, was significantly weaker than the euro, which led to a rise in the GBP/USD rate to almost 1.33, marking its highest level for a year. Further pound appreciation may be limited by expectations for tomorrow's data on British wages.

The low pace of growth (below the consensus of 2.3% YOY) could influence the British currency's depreciation. On the other hand, the higher pace could increase the probability of a more hawkish statement from the Bank of England.

Tomorrow's preview

At 10.30 a.m., the Office for National Statistics (ONS) will publish British data on the labour market- including, i.e. the unemployment rate, change in the number of unemployed and data on July's average wages. The greatest attention will probably be put on the latter, due to their influence on inflation.

In recent months, the faster pace of wage growth has made the average British wages decrease in real terms, which may also reduce their consumer spending and negatively affect the GDP growth pace. The median of market expectations assumes a 2.3% YOY increase, compared to 2.1% in July.

Today, the pound appreciated significantly due to better than expected data from August on consumer inflation. Therefore, data in line with consensus or above could increase the probability of tightening the monetary policy and support further appreciation of the pound.

Half an hour later, Eurostat will publish data on change in employment in Q2 and July's data on industrial production. Consensus assumes the increase of the first by 1.4% over the same period last year, compared to 1.5% in the previous quarter. Except for the third quarter of 2016 (+ 1.2%), the change in employment in the previous five quarters was between 1.4% and 1.5%. Therefore, this reading will probably have a limited impact on the euro.

Industrial output may be slightly higher, which is expected to grow by 3.4% YOY in July. In June, it was 2.6% and a month earlier it was 3.9% - the most for nearly six years. A reading near this level could confirm the good condition of the eurozone's economy and support the single area’s currency.


12 Sept 2017 15:33|Bartosz Grejner

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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