Afternoon analysis 14.09.2017

A hawkish statement from the Bank of England led to significant appreciation of the pound - the GBP/USD pair was on annual highs. Better than expected data on consumer inflation in the US is likely to increase interest rates hike probability and may affect the dollar's appreciation.

GBP/USD pair above 1.33 level for the first time since September 2016

In line with expectations, the Bank of England (EoB) has left both interest rates and bond-buying program unchanged at 0.25% and 425 billion GBP per month respectively for Treasury bonds and 10 billion GBP for corporate bonds. Moreover, according to the consensus, the interest rate was left at the current level: 7 people voted for maintenance and 2 for raising.

The BoE statement on the restriction of monetary stimulus could be surprising in the coming months. It may be indicate an appropriateness to bring the price growth rate back to the inflation target (currently above the estimates: 2.9% vs. 2.5%).

As a result of the increased probability of a BoE rate hike, the pound has appreciated sharply. In relation to the dollar, the British currency was valued the most since September 2016 - the GBP/USD pair crossed the 1.33 level. In turn, in relation to the euro, the value of the pound rose to the highest level since July 27th, and the EUR/GBP rate fell to the 0.89 boundary.

Market participants were also surprised by the data from the US economy regarding the price growth in August, which turned out to be higher than expected. The main consumer inflation index (CPI) rose to 1.9% compared to the same month last year, which was 0.1 percentage point above expectations and 0.2 percentage points over July's level. The core inflation index (excluding energy and food prices) was 1.7% (on a yearly basis) the fourth month in a row.

Higher inflation readings in August increase the probability of earlier monetary tightening in the US. Initially, the dollar appreciated rapidly- the EUR/USD rate fell from 1.189 to 1.184 and the USD/JPY from 110.5 to 111. In the following minutes, the growth rate faded and the dollar's trading returned to pre-inflation data.

We will know the final reaction to the data in the following hours when the US investors will be more active. The US Department of Labor provided a positive set of data to the dollar, according to its report both the number of initial jobless claims and the number of insured unemployment, were above expectations. So the chances of continuing the appreciation trend of the dollar are getting higher.

Pound on 2-month highs

The BoE's comments on the possibility of tightening the monetary policy in the UK led to an increase in the GBP/PLN exchange rate to approx 4.827 level. Today, the pound was also the most expensive against the zloty since July 6th, continuing the upward trend from the previous days. Valuation in relation to other main currencies remained close to yesterday's closing levels.

However, the condition of the zloty has remained relatively weak. Its value for one euro has fallen to the lowest one since a month - today, for every euro one had to pay even slightly over 4.29 PLN on the interbank market. If in the following trading hours a clear appreciation of the dollar is observed, the Polish currency may be subject to selling pressure, and the EUR/PLN exchange rate may approach 4.30. Its overshooting would mean the highest exchange rate of the euro in relation to the zloty since the end of April this year.

Tomorrow's preview

On the last day of the week, there will be a series of data from the US market, but it may be slightly less important than today's inflation data. At 2.30, the Census Bureau will publish August's data on retail sales. In the previous month, both total sales and sales (excluding vehicles) unexpectedly increased by 0.2 percentage point above consensus - by 0.6% and 0.5% respectively on a monthly basis. The median of market expectations assume that this rate will be maintained at the core index (vehicle excluded) and its downward trend to 0.1% for the main sales index.

Three quarters of an hour later, the Federal Reserve will release August's data on industrial production in the US. Its growth rate in July slightly disappointed the market expectations (by 0.1 percentage point) and amounted to 0.2% per month. Following an increase of 0.2% in June, the manufacturing production fell by 0.1% MOM in July, the largest component of the overall production index. While consensus estimates an increase by 0.3% MOM in manufacturing, the pace of overall production output may fall to 0.1% MOM, the lowest value since May.

45 minutes after the publication of data on industrial output, the University of Michigan will publish September’s preliminary data on consumer confidence index. Last month, it rose near the multi-annual highs of January this year to 96.8 points, although the final reading was lower by 0.8 points from the initial one. In the current month, the climate index has probably been decreased by recent hurricanes that affected some US consumers. The median of market expectations point to its decline to 95.1 pts, which would level June results.

Although tomorrow's data may increase the range of the dollar's fluctuations, their impact may be relatively limited. Now, the market is mainly focused on US tax system reform and inflation, and its impact on the Federal Reserve's decision on interest rates. In addition, some part of the data may be disturbed by the aforementioned hurricanes, therefore, they have potentially less impact on dollar trading.