Afternoon analysis 20.06.2017

The governor of the Bank of England comments regarding the interest rate weakened the pound. Industrial production in Poland increased above expectations in May, however, the PPI index underlined a subdued inflation.

A weakened pound

During the last Monetary Policy Committee’s meeting in Great Britain, although the interest rate was left unchanged, three MPC members voted in favour of a rate hike. This was probably one of the factors that kept the pound in a relatively good condition amidst the political turmoil associated with the recent elections and the ongoing Brexit process.

During a meeting with London’s banking community and the Finance Minister Philip Hammond, Mark Carney, the governor of the Bank of England and MPC’s chairman, said that “now is not the time to raise interest rates”. According to Carney, the weak wage growth rate will likely be accompanying the process of the UK leaving the ranks of the European Union and the monetary policy cannot prevent it.

Ruling out raising interest rates in the near term caused a strong negative reaction on the pound. It fell against the dollar from 1.275 to as low as 1.267, closing in on two-month lows. The dollar, on the other hand, managed to maintain most of the gain mainly achieved yesterday, though its volatility up until now was relatively low. The EUR/USD pair traded in a narrow range between 1.114 and 1.116 for most of the day (until 3 p.m. CET). However, the volatility could increase as US investors become more active after the start of the US session.

Zloty slightly lower

The Polish currency was somewhat in a weaker state today not only due to a slightly stronger dollar but also due to rapidly decreasing oil prices. The price of crude oil fell to approx. 43 USD a barrel, the lowest level since mid-November, which also deteriorated the global sentiment. The zloty was also lower as a result – EUR/PLN was up at a level as high as 4.23, CHF/PLN moved up to 3.90 – close to the upper boundary of the last three weeks, and USD/PLN increased to 3.79.

At 2 p.m. CET, the Central Statistical Office (GUS) published some mixed data regarding the Polish economy. Industrial production grew by 9.1% year-over-year, 0.5 pp above expectations, and construction production increased by 8.4% YOY. Although the 8.4% YOY increase in retail sales was 0.5 pp above April’s reading, it fell short of market expectations of a 9% YOY growth rate. The consensus also pointed towards producers inflation (PPI) to grow 2.9% YOY (vs. 4.3% in April) – an increase of 2.5% YOY was the lowest seen since November, underlining a subdued price growth in the economy in recent months.

The reaction of the zloty to the data was fairly limited. Although the data slightly deviated from the consensus, the general level didn’t surprise. Hence, they will probably have a relatively low impact on the Polish currency – we could see a slight increase in its value against the major currencies, mainly due to a better reading of industrial production. However, the zloty will probably react to changes in the global sentiment to a much greater extent than to internal factors.

Tomorrow’s preview

There are no planned important events for tomorrow which could significantly influence the currency market. At 2.30 p.m., the National Association of Realtors will publish data regarding existing home sales in May. The median of market expectations points towards a 0.5% decrease compared to April. Investors could look at this publication more closely as last week’s data showed a big slump in both building permits and housing starts. Although tomorrow’s data could add some volatility to the dollar, the final impact will probably be a limited one.

At 4.30 p.m., the Energy Information Agency (EIA) will share its weekly petroleum report. Investors will mostly focus on stock data (mostly on crude oil and gasoline) and US production as well. The price of crude oil fell last week to the end of November level when the first production cuts were officially agreed between OPEC and non-Opec countries (Russia being the biggest among them). Their lower level in recent months also translated to a lower level of inflation which has been seen in most countries. Should tomorrow’s EIA report be viewed once again as a bearish one and oil prices started to fall rapidly yet again, this could cause the sentiment to deteriorate and negatively impact emerging market currencies, including the zloty.