Afternoon analysis 24.10.2014

Solid data from the United Kingdom strengthened the pound. The zloty rose due to increasing risk appetite and watering expectations that interest rates cut will be cut. 25 banks failed to pass the ECB's stress-test, according to Bloomberg.

The British economy confirmed its leading position among developed countries on GDP performance. In third quarter country's GDP rose 0.7 percent from the previous quarter and 3 percent on a yearly basis. The result was in line with expectations. In the second quarter the growth stood at 0.9 percent and 3.2 percent, respectively.

Today's data somewhat eased a negative view that was caused by recent reports, when data on retail sales, industrial production and inflation growth missed expectations. But we have to remember, that GDP growth was weaker than in the previous quarter. So the question is, whether the British economy is to continue to move on this negative path, or was it only a slippage.

Nevertheless, the British currency had posted three days of loses before today's report pushed it higher against its major counterparts – the dollar and the euro. So given that, one can think that although the overall performance of the economy was deteriorated, the market participants' view on recent data from the UK is rather positive.

The ECB ahead of challenge

The latest reports from the European Union showed that the economic conditions are better that previously we could have thought. After the German PMI was shown, the odds for recession in the major euro zone's economy was lowered. In addition, the figures from the UK amplified a positive view on this economy, despite the fact, that the growth was slightly slower.

The main risk factor in the next week may be the release of the ECB's asset quality review and the stress-tests results (a broader view on details in our morning commentary). It may also reveal that the European Central Bank won't meet its goal of extending its balance sheet by one billion euro without a wider asset purchases program. So it may result in increased probability of launching at least corporate bonds purchases or even full quantitative easing that encompasses government bonds.

If the second scenario is to win, we will probably observe a drop of the euro combined with increased risk appetite. Given that, the zloty will rise probably rise against the euro and fall against the dollar in the longer term.

However, volatility of the zloty may be tamed due to a lower probability that the Monetary Policy Council will cut interest rates in November. The National Bank of Poland president Marek Belka said that the zloty looks undervalued. His words have to be seen in the context of September's MPC meeting, when the policymakers pointed at risk of currency depreciation as a reason for leaving interest rates unchanged. Moreover, Jerzy Hausner from the MPC said that he sees no room for additional cuts. He also added that the probability of leaving rates at current level is now higher than of additional cuts.

Shift of neutral members of the MPC form an easing stance to wait and see approach signals that the November cut may never occur. That scenario was reflected in today's zloty developments – the Polish currency posted significant gains against all its major pairs.

If a positive view on risky assets maintains in the next week, the zloty may rise further against the euro and the dollar but the gains against the US currency will be smaller than against the common currency.