Daily analysis 02.02.2017

The Bank of England has a dilemma whether to prevent increasing inflation, or to sustain a relatively positive business cycle. No surprised from the Fed, but the dollar continues to lose its value. The weaker USD is supporting the emerging market currencies, including the zloty. The EUR/PLN is near 4.30.

Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.

• 13.00: Decision from the Bank of England regarding interest rates, new macroeconomic projections and the minutes from the forthcoming meeting (estimates: interest rates will remain at the level of 0.25%; assets purchasing will remain at the level of 435 billion pounds).
• 13.30: Mark Carney’s press conference.
• 14.30: Weekly jobless claims from the USA (estimates: 250k).

Bank of England’s dilemma

At approximately 1.00 PM, the Bank of England will reveal its decision regarding interest rates and the scale of assets purchasing. The market does not expect changes in basic parameters of the monetary policy. However, the general message from the Bank of England will most likely be carefully analyzed in reference to the macroeconomic data.

The latter has been significantly volatile recently. The risk of recession in the United Kingdom has decrease over the past few months, which was indicated by differences between projections for August and for November. Nevertheless, there was a significant increase in likelihood of the UK exceeding a 2% inflation target (70% of chances). Moreover, the BoE estimates that there is a 50% likelihood that inflation will go above 2.8% in the fourth quarter.

Anxieties over inflation are confirmed by the data regarding the production factors. In December, this index increased by 15.8% YoY. The PMI subindex of the production factors for January was quite spectacular as well and reached its highest value in more than twenty years (88.3 points). However, the consumer prices increased by 1.6% in December, which was 0.2 percentage point higher than the market consensus.

Such parameters should force the BoE to withdraw from extremely mild monetary policy. The market’s attitude is similar. Since the end of January, the likelihood of rate hikes at the beginning of 2018 is higher than the likelihood of leaving interest rates unchanged.

However, the BoE needs to keep the Brexit-related dangers in mind. No negative results of leaving the EU market have appeared for the time being. Depreciation of the pound was stimulative for export and this reduced the uncertainty. Moreover, employment level is very high in the United Kingdom, which supports consumption, even though in December the retail sales index was at the level of negative 2.0% MoM (estimates: negative 0.4%), which was its worst result since 2011.

The BoE’s attitude us relatively dovish. Therefore, we think that the central bank is neither interested in suggesting increasing anxieties over growing prices, or in wearing-off the pound by too mild message. The BoE’s announcement, as well as Mark Carney’s press conference, will most likely be neutral. Potential changes on the GBP/USD would be caused by the dollar, rather than the pound.

Fed’s message

Yesterday’s message from the Federal Reserve was neutral. The beginning of the announcement was simply a description of the current economic condition (strong labor market, moderate economic growth and increasing inflation, which remains below the target). There was also an excerpt regarding an improvement in sentiment of consumers, as well as of entrepreneurs. However, this was not surprising as well, because indexes regarding the household sentiments have been at their approximately fifteen-year maximum.

Nevertheless, the dollar lost its value shortly after the FOMC announcement. Moreover, the American two-year treasury bonds decreased by 3 baseline points and reduced its growth, which was caused by positive ADP and ISM data. This goes to show that investors remain negative towards the dollar, because they’ve been ignoring positive data for the USD. Moreover, they’ve been interpreting neutral data as negative. The market is still dominated by the fear of protectionist comments that may appear from the new American administration and may even smother positive macroeconomic readings.

Zloty is on a tidal wave

As soon as the Federal Reserve published its message from its yesterday’s meeting, the zloty gained against both the euro and the dollar. Moreover, the PLN has basically reached its level from before the elections in the USA, which can be considered a success.

However, this also confirms that the zloty has been strongly dependent on the dollar’s global condition, as well as the difference between the Polish and both German and the American debt. Therefore, if the depreciation trend on the USD is turned, not only may the USD/PLN increase, but also the EUR/PLN may work-off its recent losses. However, taking into consideration the external situation, a relatively strong zloty is the base case scenario for the time being.