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Daily analysis 21.03.2017

21 Mar 2017 12:30|Marcin Lipka

The pound has been supported by high inflation. However, this may harm the British economy in the forthcoming months. Quite hawkish comments from both Evans and Harker. The condition of the zloty is improving. Not only has the Polish currency gained against the franc or the dollar, but it has also gained against the forint. The EUR/PLN is near 4.26.

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

  • No macro data that could significantly impact the analyzed currency pairs.

Weak pound supported by inflation

Despite the previous announcements that the Brexit process will be initiated by the end of this month, yesterday’s information about the official date of this event (the 29th of March) has caused the pound to wear-off significantly.

The pound’s condition against both the euro and the zloty has deteriorated in particular. This morning, the EUR/GBP was above 0.8720 and the GBP/PLN was testing the area of 4.90. However, this situation has slightly changed after the data regarding the British inflation was published. The general British inflation increased 2.3% YOY (estimated: 2.1% YOY) and baseline inflation increased 2.0% YOY, which is by 0.3 percentage point higher than estimated.

It shouldn’t be surprising that the transport cost increased (6.6% YOY and 1.1% MOM). However, what’s interesting is that baseline inflation’s components accelerated as well. “Clothing and footwear” increased 1.1% MOM, “furniture, household equipment and maintenance” increased 2.4% MOM, “recreation and culture” increased 0.6% MOM and “restaurant and hotels” increased 0.7% MOM.

In regular conditions, these results would have been caused by a higher demand, hence they would suggest an improving economic condition. However, this time the reason is different and is mainly related to the pound’s wear-off, as well as to increasing costs of economic activity. Real salaries have not been increasing and positive trends in retail sales from the end of 2016 have been reduced to zero.

The Bank of England will have a serious dilemma. They will have to decide, whether to start increasing interest rates, or try to stimulate the economy with a low credit cost (and risk a further inflation growth). Evaluation of both of these scenarios is additionally hampered by the potential Brexit effects, which are very difficult to estimate.

It seems that the BoE will continue its mild monetary policy for the time being. This should sustain a negative sentiment towards the pound, especially considering the forthcoming negotiation regarding Brexit. This may deteriorate the sentiment of both the British entrepreneurs and consumers.

Ignored hawkish signals

Three of the Federal Reserve representatives made their testimonies yesterday. Neel Kashkari was dovish. He said that the American economy is not endangered with inflation and the Fed shouldn’t rush rate hikes. However, this statement shouldn’t be surprising, since Kashkari was the only FOMC member who voted against the monetary tightening in March.

Both Charles Evans (clearly more dovish than the consensus in the past) and Patrick Harker (interview with CNBC; more hawkish than the consensus in the past) have supported a total of three rate hikes for 2017. However, none of them have included fiscal changes in their forecasts, but Harker said that these changes may accelerate rate hikes and Evans claimed that they may increase inflation.


Nevertheless, the most significant thing is that the Fed members have been presenting a consistent message regarding rate hikes for this year. In order to fulfill a more aggressive scenario of monetary tightening, changes in fiscal policy are required. Before they appear, the dollar remain under pressure.


Zloty continues to grow

The zloty’s condition continues to be improved by the global changes, mainly by the weaker dollar and a positive sentiment towards the emerging market currencies. The latter has also caused both the Mexican peso and the South African rand to gains approximately 10% against the USD since this year’s beginning. An approximately 8% growth has been quoted by both the South Korean won and the Russian ruble. As for the zloty, it has increased approximately 6% against the dollar since this year’s beginning.

Moreover, the zloty has also been gaining against the emerging market currencies this morning. The PLN/HUF increased 0.5% and is now at the level of 72.4. Before the announcement of the data regarding the British inflation, the PLN was the strongest of thirty-one currencies of the developed and emerging markets. The dollar’s weakness should continue to support the zloty. However, once this trend is disturbed, the zloty’s wear-off may be relatively intense.


21 Mar 2017 12:30|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.

See also:

20 Mar 2017 15:29

Afternoon analysis 20.03.2017

20 Mar 2017 12:26

Daily analysis 20.03.2017

17 Mar 2017 15:28

Afternoon analysis 17.03.2017

17 Mar 2017 12:19

Daily analysis 17.03.2017

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