The stronger dollar and tensions between China and the USA in terms of trade weighed on the zloty, although the sell-off could have been higher if not for the good relations between the EU and the USA. BoE unanimously raised its interest rate, slightly surprising the market.
Brexit will continue to be the most important one
The broad market has seen a worsening of sentiment today due to the threat of intensification of the trade war between China and the USA. The main stock exchange indices in both Asia and Europe have fallen markedly. A deterioration of the global sentiment finally had a negative effect on the zloty, which has remained in good condition so far. The Polish currency wasn't also helped by the simultaneous strengthening of the dollar after yesterday's statement by the Federal Reserve emphasizing strong economic growth.
The EUR/PLN jumped today from 4.26 to even 4.285, although it seemed to be quite a big daily rebound, it was inside the range of fluctuation of the previous day, and the lower level of this range is also the lowest level since a month and a half. The downward pressure on the Polish zloty is limited by the improvement in the relationship between the U.S. and the EU, as well as good data from the Polish economy.
The fate of the zloty, however, depends mainly on trade issues and tomorrow's macroeconomic data from the US. The intensification of customs tensions between China and the USA may cause supply pressure on the zloty. A similar effect could result in an increase in wage growth in the US above market expectations, suggesting a bigger likelihood of a quicker monetary tightening.
Today's main event was the Bank of England's interest rate decision. It was raised by 0.25 pp to 0.75%, as expected. What surprised the market, however, was the unanimity of the Monetary Policy Committee, which decided on the increase by 9 to 0 votes, while two votes were expected to be against. Initially, the pound was clearly gaining. However, during a press conference attended by Marek Carney, the President of the Bank of England, its value in relation to the dollar fell even below the level before the publication, and in relation to the zloty it reversed the whole growth and stabilized at the level of about 4.80 PLN.
Perhaps after the unanimous hike, the market expected a more "hawkish" message from Carney, which did not happen. The August edition of the Inflation Report was also published together with the statement after the meeting. The British central bank increased its inflation and GDP growth projections for the period by 0.1pps (with the exception of GDP in 2020, which remained unchanged).
They also stressed the very good condition of the labour market and the low unemployment rate, which is likely to decrease even further. In the third quarter of 2021, inflation is expected to reach 2.0%, i.e. to coincide with the inflation target. To bring inflation down to this level, three rate rises in the next three years are expected to help.
The overall tone was positive for the pound. However, the Bank of England itself stressed in a press release that the UK's process of leaving the EU could have a very significant impact on the economy. Brexit and uncertainty around this process will therefore have a significant impact on the valuation of the pound, at least until the UK physically leaves the EU.
The most important event of tomorrow's day, or perhaps of the week, will be the publication of the labor market report for July by the U.S. Department of Labor. The most important data from the report are those on the change in employment in the non-farm sector and on the average hourly wage. The estimates for the former were already known on Wednesday when the reading from ADP exceeded market expectations and amounted to 219,000 new jobs. Confirmation of a rise in employment around this value in the official report will allow the market to focus its attention on the most important number - wage growth.
The change in the average hourly wage has a significant impact on the change in inflation expectations. Wage increases above expectations may suggest higher inflationary pressures. The market consensus assumes an annual growth rate of 2.7% (as was the case a month ago). Deviation from this value by as much as 0.1 percentage point may cause significant fluctuations of the dollar. Given the positive message from the Federal Reserve, which strengthened the dollar, an increase in average wages of 2.8% or more could significantly strengthen the dollar.