Afternoon analysis 22.03.2016

During the afternoon trading the pound sell-off deepens. The Hungarian central bank unexpectedly lowers interest rates. The zloty remains stable to both the euro and the dollar, but gains to the British currency.

The situation of the main currency pair before 4:00 PM is relatively stable. The euro pared down most of the losses against the dollar after the morning reports from Brussels and the EUR/USD traded close to 1.1230-40. Higher volatility was also not observed after the manufacturing PMI reading from the US was published.

On the contrary, significant swings are observed on the pound. In today's first analysis we noted a pressure on the British currency caused by Brexit fears, which might strengthen further after Belgian events. Finally, the pound lost more than 1% to both the euro and the dollar.

Additionally, it is worth noting that due to a recent firmer zloty and weaker pound the GBP/PLN dropped below 5.40 level. It is also the lowest rate it has been since December 2014. Given the fragility of the pound, it is possible that the nervousness regarding the pound may continue further, especially if incoming opinion polls confirm greater Brexit concerns.

Hungarians surprise. The zloty remains stable

Before today's Hungarian central bank (MNB) decision, only one economist out of 19 surveyed by Bloomberg predicted a rate cut. At 14:00 CET, it turned out that the MNB decided to cut the benchmark by 15 pbs to 1.2%. Additionally, it reduced the deposit rate down below zero to negative 0.05%.

Analysts didn't expect the monetary easing, because according to Bloomberg, “deputy governor Marton Nagy previously signalled potential benchmark rate cuts no earlier than May.” The forint slumped after the decision by around 0.5% to major currencies.

The pressure on the forint may remain due to a dovish message in the statement. The MNB writes that, “the Monetary Council remains ready to use every instrument at its disposal to contain second-round inflationary effects.”

It is also worth noting that the MNB used the March inflation report to support its decision. Compared to the December report, the expected prices growth is reduced from 1.7% to 0.3% in 2016. On the other hand, there is a clear difference between approaches from the MNB and the Polish MPC.

The Polish MPC were also making decisions on whether rates are having very similar inflation reports, which shows slower inflation by 1.4 percentage points comparing to the November central bank projections. Additionally, the Hungarian CPI is expected to return to target sooner than the Polish one.

This information should support the zloty not only toward the Hungarian currency, but also during the risk off sentiment around the world due to the fact that Polish MPC is far from easing the monetary policy.