Strong pound's increases (Afternoon analysis 08.02.2018)

The pound appreciated significantly after the Bank of England's announcement on future interest rate decisions. The dollar continued to benefit from volatile sentiment and yield growth in the US government bonds. The EUR/PLN pair is close to 4.17 and the pound is appreciating to 4.77 PLN.

Will market bet on only two rate hikes?

The Bank of England's meeting was the most important event today. The main parameters of monetary policy in the Islands have not been changed - interest rates, the scale of the bond-buying program and the distribution of votes concerning February's decision have remained unchanged (9:0 for no changes).

The crucial element of the BoE message was its final part. The Bank of England claims that the monetary policy will have to be tightened earlier and a bit more strongly than it was expected in November's report in order for inflation to return steadily to its target.

After this report, a significant increase in the pound on the global market was observed. The British currency strengthened by about 1%, as the monetary authorities were clearly more hawkish than in November. This may mean that interest rates will be raised in May (previously expected to be in the Q3). Another scenario is likely to happen.

It cannot be ruled out that BoE will decide within the next year on two increases of 25 basis points from 1.00% level (May and February 2019). Such a scenario may support the expected demand growth in the economy, better external conditions and pressure to accelerate wage growth.

The positive situation on the pound and the British economy may be threatened by Brexit. The BoE is likely to assume some sort of compromise with Brussels in its models, not a hard Brexit. If the negotiations were to move towards a hard Brexit, then the chance of quicker monetary tightening would be decreased.

The higher pound valuation translated into movements on the GBP/PLN pair. It has grown from around 4.73 to 4.77-78. It has been a significant growth but with a clear message from the Bank of England, good sentiment on the sterling should be maintained, which increases the chances for further pound growth, also in relation to the zloty. Moreover, it seems that the scenario of two increases in the next 12 months may be "bet on" by the market.

Weaker zloty

The global market is clearly not helping the zloty. Strong volatility in shares reduces the attractiveness of the developing market. The yields on the US Treasury bond returned close to long-term records, which is also not good for the zloty. Additionally, it was connected with the relatively dovish approach of Professor Osiatyński and Prof. Hardt during yesterday's conference, which practically destroyed the chances for rate hikes this year.

As a result, the EUR/PLN pair fluctuated close to 4.17, and today, the dollar or the franc exceeded the 3.40 PLN and 3.60 PLN respectively. The pound's quotations increased, whose valuation in relation to the euro rose the most since September, and in relation to the zloty, values close to the 4.77 level were observed.

The zloty may be threatened by the worse condition of the currencies of emerging markets. Today, China's yuan weakened by 0.8% in relation to the dollar, which may suggest limited interest in emerging markets from foreign capital. This may also be a burden to the zloty in subsequent days.