Afternoon analysis 06.08.2015:
The pound dropped as the Bank of England stance was surprisingly dovish. Solid numbers from the US labor market. The zloty dropped against the euro and the dollar and was steady against the pound and the franc.
Surprisingly, the Bank of England presented a rather dovish stance. Only one member of the Monetary Policy Committee (Ian McCafferty) supported the case for the interest rate hike against the other eight members who were opposed. The market consensus was that two MPC members would vote to increase rates.
At a news conference the BoE President Mark Carney said that the monetary authorities will not make any pre-commitments regarding the interest rate increase. The decision on that matter will be data-driven. The central bank expects the inflation rate to return to the goal within two years. The same view was presented in the previous BoE's forecast, thus the central bank is not worried about the recent plunge in oil price.
Earlier today, the report on industrial production in the UK missed the forecast. It declined 0.4 percent against the plus 0.1 percent that was expected. Production increased 0.3 percent in the prior month (revised down from the 0.4 percent initially reported). Moreover, the numbers on housing prices disappointed. The average price dropped 0.6 percent. It was the first decline in five months.
Given the situation, the pound posted a severe decline against the dollar. Later the currency tried to recoup some losses, but it will remain under pressure in the near future.
Thursday's data on unemployment claims remained solid. The number of unemployment claims stood at 270k – a result that signals an ongoing expansion in the labor market. Last week the report showed 267k new unemployed people. All in all, the number has remained near the lowest level for almost four decades.
Now the focus shifts to the report on the employment situation scheduled tomorrow. Expectations are for a 225k increase in employment in the non-farm sector and the unemployment rate is expected to remain at 5.3 percent. A similar result will support the dollar as the chance for an interest rate hike in September will increase.
Recently the sentiment towards the emerging market currencies has deteriorated. The major factor responsible is the Fed plan to raise rates. Although the latest reports from the US were mixed, they were strong enough to support the case for hikes. The decision is due on 17 September.
However, other factors also negatively influence the risky currencies. Russia and other commodity countries were hit by the recent plunge in the price of oil. Today the oil price dropped to the lowest level since mid-March and it moves to the lowest level since 2009. China - the major commodity importer - is slowing down. Turkey joined the war on the Islamic State and it might further destabilize the economy.
Moreover, the zloty has to face internal problems in the political field. The proposal to converse the franc credits to the zloty is hurting the banking sector. Today almost all banks in the Warsaw Stock Exchange declined. Earlier, politicians said that they plan to impose additional taxes on banks and large retailers. As a result, the sentiment against the Polish market has significantly deteriorated.
Given the situation, the probability of a stronger zloty's increase is limited. If tomorrow's data from the US labor market is quite good, the zloty may decline further.
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