Daily analysis 19.08.2014

The EUR/USD is falling despite global sentiment improvement. US inflation and housing data are key in the incoming hours. The pound is losing value after weaker inflation form the UK. The odds for interest rate cuts are rising. Zielinska-Glebocka is leaning toward the dovish camp.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 14.30 CET: CPI inflation from the US (survey: +0.1% m/m; excluding food and energy +0.2% m/m.
• 14.30 CET: US housing starts (survey: 963k seasonally adjusted annualized data).

Sentiment improvement. The data. The pound

The Monday's session proved that the US market is still pretty strong and all corrections (caused by geopolitical tensions) are used to by stocks. In result the S&P 500 index closed only 1% below all-time-highs and technological NASDAQ reached 14-year highs. The bullish mood was fueled also by the macro data. Despite that NAHB index is not the most important benchmark regarding the conditions of housing market but its rise to 55 points (survey at 53; the highest this year) gave a lot of hope that single family homes may finally rebound and bring more output to the economy.

The “risk on” sentiment didn't bring any relief to the EUR/USD. The most heavily traded currency pair dropped to 1.3350 in early afternoon. This time, however, the reaction can have some reasonable basis. Better-than-expected NAHB increasing the odds that today we should get stronger housing data (new starts at 14.30 CET). If we see a significant improvement in real estate market, then Yellen's arguments on keeping interest rates low due to subdued property market should lose the steam and therefore interest rates hikes may come earlier than expected.

At 14.30 CET we are also having the CPI from the US (the PCE, Fed's favorite price index will be published at the end of the month). The consumer prices probably slow a bit and decrease toward 2.0% y/y (currently at 2.1%, more precisely 2.075). Because the CPI in July last year rose only by 0.17% we would have to see a reading below 0.05% m/m to have a figure below 2% (taking into the account rounding). On the other hand, investors should not count on higher publication (above 2.1%). Both foods and energy should keep the prices tight. The risk is on the lower side but without significant probability to breach 2% to the south.

Dark clouds are heading toward the pound. The British currency is at significant pressure after the recent BOE inflation report. Additionally, lower-than-expected CPI hit the wires (1.6% y/y vs 1.8% y/y) today. Lack of consumer prices pressure is a good argument for central bank doves not to rising rates this year. It pushed the cable toward 1.6650 – the lowest level in four months. The market in following hours should be pretty stable due to Wednesday's release of “minutes”. In a scenario where no MPC voted for a hike we should see additional selling pressure on the pound and further GBP/USD slide (below 1.66) is pretty possible.

Summarizing the market should be pretty calm and the sentiment on the EUR/USD will be shaped by afternoon data. If we get a solid housing reading (above one million) and the inflation remains close to the consensus level we should not rule out the 1.3300 test. On the other hand, in case of much lower reading (below 950) the dollar should weaken (especially after solid NAHB) even toward 1.3400.

Interest rate cuts are getting more probable

The zloty dropped below 4.19 level per the Euro due to a significant improvement of the global sentiment and close to all-time-highs valuation of US equities. In the zloty rate we still have around 1-2% of “risk premium” caused by the Ukrainian issues which should bring us closer to 4.15-4.16 level when the situation in the East begins to stabilize.

The local currency, on the other hand, will not be supported by the MPC. An important message regarding that case came from Anna Zielińska-Głębocka yesterday. In Polish Press Agency (PAP) interview she clearly suggested that the odds for monetary loosening are rising. The cut may be around 25-50 bps. Despite that Zielińska-Głębocka opinion is not as strong as Osiatyński's or Chojna-Duch it is worth noting that last month she told PAP that “I don't see a room for cuts unless we will experience a strong GDP slowdown combined with significant zloty's appreciation”.

Such conditions have not been fulfilled yet but we feel that the MPC member tried to “explain” previous comments saying that “we all were talking in a bit different situation. Firstly, there was no Russian embargo on foods. Secondly, the projections for Europe were more favorable. We didn't also expect that the PMI (for Polish manufacturing – author's note) would drop below 50 mark”. Zielińska-Głębocka also revealed that NBP Economic Institute “verified short term projection for this year to 3.3-3.4% growth in 2014 (whereas in July it was 3.6% in 2014 – author's note).

Taking into the account that Zielińska-Głębocka (regarded as neutral policy maker recently) is leaning toward a rate cut we may assume that Bratkowski, Hausner or Belka can also join the dovish camp pretty quickly. Their comments will be critical for the September and October rate decision. The market will also focus on Wednesday's industrial production from Poland. If we get readings below Ministry of Economy estimates (around 2.0% y/y) then the odds for cut will increase further what should be a negative message for the zloty. In the following hours the EUR/PLN and CHF/PLN will be pretty stable with trading range around 4.18-4.19 and 3.45-3.46 respectively.

Expected levels of PLN according to the EUR/USD rate:

Expected GBP/PLN levels according to the GBP/PLN rate: