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Daily analysis 12.07.2016

12 Jul 2016 13:24|Marcin Lipka

The pound is clearly supported by a possible quick appointment of Theresa May to the UK prime minister position. The hawkish FOMC members may begin to emphasize the necessity of rate hikes in the USA. The discussion regarding the retirement has been postponed yet again. However, the zloty remains relatively weak in the broad market.

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

  • No macro data that could have a significant impact on the analyzed currency pairs.

Smaller political risk

Yesterday, Andrea Leadsom unexpectedly resigned from running for the position of the Conservative Party chair. This caused Theresa May to be the only candidate for the UK prime minister position. Moreover, she is to be officially elected this week. This decreases the political risk and is positive for the British currency.

The pound strengthened by more than 2% against the dollar during the past twenty-four hours. On one hand, this is quite a lot. However, taking under consideration the scale of the recent overvalue, this move should not change the negative approach towards the pound. It remains unclear how will the negotiations between London and Brussels look like. May clearly declared that she wants to limit the amount of immigrants. On the other hand, the EU will probably not give access to its market, if the Brits block a free movement of people.

It still remains unknown who will be in the new government. Today's Financial Times speculates that Boris Johnson, as well as Michael Gove may become the members of May's cabinet. As we know, they are well known Brexit supporters. This could be an attempt to unite the Conservative Party. On the other hand, the more Brexit supporters on the government, the longer the negotiations with Brussels may take. This would increase the risk of the United Kingdom losing the access to the common market.

The Bank of England meeting on Thursday, should be most important for the pound in the short-term. However, now that there was a visible rebound, the reaction on a decrease in interest rates (if it occurs, of course) may be definitely less intense. The risk of clearly going below the 1.30 level on the GBP/USD decreased for the time being.

Will Fed return to discussion regarding rate hikes soon?

Getting back to the previous Federal Reserve meeting for a moment, it is worth noting that the main reasons for keeping the current interest rates level were the fear of the labor market, as well as the Brexit related risks. The Labor Department data should cause the anxieties regarding the American economy to fade away.

The British referendum should also not be a significant danger for the American, as well as the global economy. The Federal Reserve members should not notice any significant risks for the consumption level in the financial market. The S&P 500 index reached its highest levels in history yesterday.

Moreover, we received two statements from two representatives of the Federal Reserve yesterday. Of course, the fact that Esther George, as well as Loretta Mester both have hawkish views, does not mean that the entire FOMC will support them. However, the Kansas Fed chairwoman suggested that she may return to the idea of voting for rate hikes, and warn of the risks of leaving interest rates at too low level. The Cleveland FOMC representative claimed as well that, “moving slowly towards higher interest rates is not favorable for the American economy.”

Regarding the monetary tightening, it is also worth mentioning the interview with John Williams for the MarketWatch website that was conducted one week ago. The San Francisco Fed representatives did not want to say, how many rate hikes would he see this year. However, Williams emphasized that Brexit is not a significant danger for the American economy in his opinion. Moreover, he continues to expect an economic growth at the 2% level. It is also worth adding that this interview was conducted before the most recent positive report from the American labor market. Thus, Williams would currently have yet another argument to confirm his view.

Thus, the market may yet again begin to focus on statements from the Federal Reserve representatives. Profitability of treasury bonds continue to be at a very low level. However, they may begin to grow significantly, if the market has to change its approach and begin to estimate a significantly faster monetary tightening. This, on the other hand, would be positive for the USD, especially against the emerging markets currencies.

Zloty is slightly stronger

The zloty is gaining against the main currencies due to a positive global sentiment. However, its appreciation is still significantly smaller than appreciation of the Hungarian forint, for example. It is likely that investors are afraid that Fitch may downgrade Poland's rating on Friday, especially considering that in January, “soothing of the fiscal policy that will deteriorate the public debt trajectory”, has been mentioned as an element that may cause a downgrade.

However, it is difficult to say will the trajectory actually deteriorate. The Council of Ministers has yet again postponed the discussion regarding a decrease in retirement age. Thus, it is difficult to say how will Fitch react on the government's decision. Will the agency consider this as postponing the inevitable and downgrade the perspective? Or maybe it will wait for the actual decision and the rating parameters will remain unchanged?

The uncertainty regarding Poland's loan credibility may continue until Friday. This will hamper the EUR/PLN descend below the 4.40 level, even if the global sentiment remains favorable.

12 Jul 2016 13:24|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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