Afternoon analysis 14.01.2015

The Monetary Policy Council didn't surprise and left interest unchanged at record lows. The European Court of Justice paved the way for a full blown quantitative easing. The pound continued to gain for a second day. Poor US data weakened the dollar.

The European Court of Justice expressed a non-biding opinion that the Outright Monetary Transactions program was “in principle” legal and it is important to ensure a broad discretion in the central bank's decisions. Although the opinion is non-biding and there is still a need for ruling, this hurdle was removed from the European Central Bank's way.

The OMT has never been used. However, it was severely criticized by the German Bundesbank because it was a very fist program that introduced an option for government bond purchases by the ECB. The German central bank view a similar solution as a factor that created wrong incentives for countries with fiscal problem – it diluted reforms and allowed governments to keep high levels of social spending due to saving from lower bond yields (lower cost of credit for government).

The euro was pressured by negative information just a week before announcing the ECB decision on quantitative easing. One can expect that the volatility will remain heightened as new speculations and unofficial leaks from the central bank will affect the markets.

The EUR/USD hit its lowest level in nine years. However, in the second part of today's session the situation altered as very weak retail sales data were released.

In December retail sales dropped 1 percent on a monthly basis after it rose 0.1 percent in the preceding period (revised from 0.5 percent). The sales excluding vehicles dropped 1 percent. Today's reports were strongly below expectations.

This factor allowed the EUR/USD to recoup some of its recent losses. Nevertheless, this move was triggered by a single factor and the overall view for the US economy (and the Fed plans for the interest rates) was not changed. Thus, we observed only a brief rebound and the general tendency was not changed in the face of QE in the euro zone and rates hikes in the US.

The pound continued to rise

Yesterday, after data on inflation, the pound dropped at first but later it moved up very quickly. Today this move was continued as US data disappointed. The GBP/USD rebound from its lowest level in 18 months.

Given the expectations for the interest rates hikes in the US within six months, the pound is in poor position against the dollar (similarly to other currencies). However, the British economy – next to the US – is the best performer among developed countries. This fact is supportive for the currency.

It was confirmed today by the World Bank that forecast 3.2 percent and 2.9 percent GPD growth for the US and the UK, respectively. And US-based institution lowered projection for global GDP growth to 3 percent from 3.4 percent earlier.

As a result, the pound exploited this factor to increase gains against the dollar after higher that expected core inflation (despite lower than projected consumer prices growth). Thus, correction in the GBP/USD was continued. However, this move has little underpinning and will probably not last for too long, but the EUR/GBP at the lowest level since 2008 will rather continue to fall.

The MPC didn't surprise

The World Bank sees Poland GDP growing by 3.2 per cent in 2015. Although a similar result places Poland in the head of the European Union, it is below long term average of GPD growth. This would have been a solid argument for the Monetary Policy Council to cut the rates.

Today, the Monetary Policy Council left interest rates unchanged at the lowest level in history. The major rate was kept at 2 per cent.

The MPC is not willing to cut the interest rates in the short term due to quite good shape of the economy (although there was some deterioration in November, the third quarter of 2014 was better than expected). The MPC's view on deflation is not clearly negative, as it is supply driven. In addition, the monetary authorities sees current weakness of the zloty and heightened volatility in the market as factors against lowering of the credit cost. Given outcome of MPC press conference, the zloty rose against its major pairs.