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Afternoon analysis 13.01.2015

13 Jan 2015 17:43|Artur Wiszniewski

The UK reports put pressure on the pound only for a moment. The euro under influence of expectations for a full blown quantitative easing. The zloty weakened before the Monetary Policy Council decision on the interest rates.

The inflation growth in the United Kingdom dropped to an exceptionally low level – December reading was the lowest since nearly fifteen years. Inflation stood at 0.5 percent on a yearly basis – significantly less than projected 0.7 percent.

First reaction of the pound was a drop nearly to its 18-month low. However, later the currency recouped most of its losses, what was a somewhat surprising and there was some basis for this movement.

Firstly, the risk of ongoing inflation decline has been signaled earlier by the Bank of England. The monetary authorities in the end of 2014 said that they expect inflation to be lower than one percent within six months.

In addition, inflation data was somewhat vague. The headline measure of prices growth was below expectation, but the core inflation gauge (that excludes volatile prices of energy and food) posted growth. Given that, one can conclude that the prices drop is not prevailing in the economy, but it is only observed in gasoline prices (due to the lowest oil price in six years) and in food prices (price was of stores in the British market).

To sum up, today's upward move of the pound was sparked by an unexpected inflation data. However, this factor is not sufficient to stop the slide of the British currency as the economy struggles (recent PMI reports and industrial production data were clearly below expectations) and the inflation is exceptionally low. Given that, the expectations for interest rates hikes shifted to 2016. Thus, today's move is only a short-term correction.

The euro pressured

The EUR/USD returned to its lowest level since the end of 2005. The common currency bend under the pressure of the expectations for a full blown quantitative easing. The crucial decision will be made at the next European Central Bank meeting on 22. January. However, there is some lingering uncertainty before the announcement of policy decision.

In the meantime, the European Court of Justice will issue an option on the accordance with the European treaties of an earlier bond buying scheme – the Outright Monetary Transactions. Although the OTM was never used, it posed a great controversy due to the German Bundesbank criticism of the asset buying programs at all.

If the ECJ opinion is not supportive for the QE, the euro may be significantly strengthened. A similar scenario will force ECB president Mario Draghi to revamp his plan for the euro zone revival. However, given current developments in the euro market, the odds for a negative scenario are very low.

The zloty dropped

After a poor session on Monday, today the zloty continued to drop. The Polish currency was pressured by the falling euro. However, it was not able to exploit a visible improvement of market sentiment, reflected by significant increase of major stock indices.

Today's data from the National Bank of Poland didn't affect the zloty. The current account balance stood at minus 268 million euro – a better result than minus 446 million expected. In addition, the trade balance was negative at minus 96 million euro.

The major event for the zloty will be the Monetary Policy Council decision on interest rates tomorrow. The market expects that there will be no change of rates, however the important thing is the MPC's assessment of the latest development in the zloty market. If the MPC says that there is no risk for price stability and the economy due to the possible European QE, significant losses and heightened volatility in the Polish currency market, the zloty may be strengthened.

13 Jan 2015 17:43|Artur Wiszniewski

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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