Afternoon analysis 14.10.2015

The dollar dropped as the report on retail sales missed the forecast. The euro increased in spite of weak data. The pound increased on the labor market data. The zloty was stable.

The eurozone disappointed again. Today's data on industrial production was weak. The report showed a 0.5 percent decline – a result below the forecast. In the prior month, production increased 0.8 percent (revised from 0.6 percent).

The latest reports suggest that the economy is decelerating. The reports from Germany were especially worrying. Recently, the nation's industry posted weak results. Moreover, the report on international trade showed a broad slowdown. Given the situation, the signs are mounting that the European Central Bank may expand its monetary stimulus.

The ECB's members are rather cautious in its declarations. Although they say they will act if it is needed, more data is needed to better assess the situation. However, some commentators see a chance for additional actions before the end of the year.

Weak dollar

Weak reports and rumours that the QE might be expanded did not hurt the euro. The common currency is currently at the highest level in over a month against the dollar. However, the weakness of the US currency is surprising.

Additional pressure was put on the dollar after the report on retail sales. It increased 0.1 percent - less than the 0.2 percent that was expected. Moreover, the report that excludes transportation equipment dropped 0.3 percent against the 0.1 percent gain that was projected. Seven out of thirteen major segments posted a decline.

There was an additional disappointment in the last few weeks. Consumption accounts for almost 70 percent of the economy. Given the weakness of the global economy, deterioration in this growth engine is worrying. Earlier, the report from the labor market and the trade balance data missed the expectations.

As a result, the likelihood of an interest rate hike dropped. A shift in expectations was reflected in the dollar's performance. In the meantime, the Federal Reserve members reiterated their stance that points at a hike in December (more on the issue in our previous commentary).

Pound's rebound

The pound was volatile during the last two sessions. On Tuesday, the British currency plunged after the inflation data. Investors took inflation below zero as a factor that will defer interest rate hikes. However, the British currency erased yesterday's decline.

The unemployment rate in the UK dropped to the lowest level since mid-2008. The three-month average dropped to 5.4 percent from the 5.5 percent in the last report. A result which is better than the forecast. But the wage growth was below the forecast. It stood at 2.8 percent against the 2.9 percent that was expected. Nevertheless, the real income growth has been the fastest since the financial crisis.

The Bank of England expects price growth to stay below 1 percent until spring 2016. According to the market consensus, the BOE will hike rates in the second half of 2016.

Stable zloty

A weak session in the Asian markets reignited worries concerning the region. As a result, pessimism prevailed in the European markets. A similar environment is negative for emerging market currencies.

The zloty was not affected by the reading on the current account. The report was in line with the forecast. Negative balance stood at 864 million euros against the 900 million euros that was forecast.

The zloty increased against the dollar and rebounded against the euro. The zloty basket was steady. The rising probability that the Fed will postpone an interest rate hike is supporting the zloty. However, the appreciation potential was limited by weak reports from the economy and increased political risk.