Afternoon analysis 17.10.2017

The highest inflation in September for 5.5 years did not help - the pound has been gradually depreciating. The zloty, on the other hand, was in better condition in the second part of the day - the CHF/PLN pair fell to the lowest level since the second half of January 2015.

Pound under pressure

The early morning consumer inflation data in the UK for September was in line with expectations, however, after midday, the British currency has started to decline sharply. It was during a hearing of Mark Carney, the bank of England's President. He mentioned the need for a compromise between maintaining high inflation and the desire to support job creation and activity. He stressed that the current inflation is in line with the previous Bank of England expectations.

When asked about when the quantitive easing may end, he said that first, the rates must be raised and the effects of monetary tightening made by the Federal Reserve in the USA must be known (some of these effects are "overflowing" into the yield curve of British government bonds).

Some of the market participants could perceive Carney's statement as less hawkish than expected and what could be expected after September's meeting of Bank of England's monetary committee. As a result, the pound in relation to the dollar has been systematically depreciating, the GBP/USD quotations fell again to below the 1.32 level. The pound may be influenced by further pressure due to Brexit negotiations.

Both sides (UK and EU) have time until Friday (according to today's statement from David Davis) to reach an agreement and continue discussions. This is also in line with the EU leaders' summit, which starts on Thursday. We can, therefore, expect significant fluctuations in the pound caused by factors like potential reports from news agencies on the potential agreement between the two parties.

Stronger zloty

The Polish currency was significantly stronger in the second part of the day. It appreciated in relation to the main currencies, as well as to Hungarian forint. The zloty was also supported by good sentiment in the market. The Polish Central Statistical Office (GUS) published data on wages and employment in the enterprise sector today. Although it turned out to be slightly below expectations (by 0.2 and 0.1 percentage points), the continuous high pace of wage growth (6% per year) and the stable employment growth pace (4.5%) confirm the positive processes that take place on the Polish labour market.

Today, the zloty was not disturbed by a slightly stronger dollar (which recently limited its appreciation). As a result, the EUR/PLN quotations fell to the 4.22 level, the lowest since July 21st this year. The zloty appreciation combined with a good sentiment made us observe the cheapest franc in relation to the Polish one since the second half of January 2015, i.e. since releasing the peg to the euro. Today, one franc cost slightly less than 3.67 PLN.

The zloty may maintain most of the profits generated today if we observe a continuation of positive sentiment on the market (and the main market's indexes in the US will not decrease). The data on industrial production and retail sales may also be significant for the Polish currency. If it exceeds the market expectations slightly, we could still have to deal with maintaining the stronger zloty.

Tomorrow's preview

At 10.30 the Office for National Statistics (ONS) will present August's data on wages in the UK. In the previous two months, the average wage growth pace was 2.1% per year, which is significantly below the inflation rate. As a result, the real wages of British people are falling, which may have a negative impact on the economic growth pace (lower consumer spending). Currently, the market consensus assumes that the previous level will also be maintained in August (2.1%). A fall below this level could have a negative effect on the pound's valuation.

Three and a half hours later, the Polish Central Statistical Office (GUS) will present September's data on the industrial sector, retail sales and producer inflation (PPI) in Poland. Investors' attention will most likely be focused on the first two data, given that it may have the greatest impact on GDP growth in the third quarter (September is the last month of the quarter).

More important than expected data could increase the chances of a more favourable reading of Poland's GDP growth, which could have a positive impact on the zloty's valuation. Both industrial production and retail sales recorded an increase (in the annual term) in growth pace in the two previous months. The median of market expectations assumes a further increase in the sales pace to 7.9% YOY and a decrease in the production growth pace from 8.8% to 5.2%. However, the likelihood of a weak reading at least in the context of industrial production seems to be limited, due to the low base last year. Therefore, the potential for the zloty to depreciate appears to be limited.