Afternoon analysis 12.02.2015

, Autor:

Piotr Lonczak

The pound gained after inflation report from the Bank of England. Swedish central bank cut rates and introduced quantitative easing. Poor reading from the US. The zloty increased against all major currencies except the sterling.

The Sveriges Riksbank moved further into unconventional monetary policy by cutting interest rates to minus 0.1 percent and launching quantitative easing. Asset purchases program worth 10 billion krone will be aimed at bonds with maturity up to five years.

The unexpected decision hit the krone – the USD/SEK moved to the highest level in five years. The bond market was also influenced – two year bond yields dropped as low as minus 0.3 percent.

The central bank will maintain loose monetary policy until inflation growth returns to 2 percent goal. Currently, the inflation rate stood at minus 0.3 percent. The Riksbank expects inflation to return to target in the second half of 2016.

Pound moved higher

The Bank of England released a somewhat dovish inflation report. The monetary authorities see no need to rise rates this year and are ready to act if inflation stays below expectations.

The BOE president Mark Carney said the inflation rate may drop even below zero in the near term. This doesn't mean however, that the economy is in deflation. In turn, a low price environment is helpful for expansion – as a result, the forecast for the economy were improved.

In spite of declaration that the BOE may cut rates, the pound moved higher against the dollar and the euro by exploiting their weakness. Recently, the British currency has been supported by solid reports from the economy, and the improvement was reaffirmed by BOE's projections.

Poor US reports

The retail sales growth disappoints for a second time in a row. Today's report showed a 0.8 percent decline after dropping 0.9 percent in the preceding month. The reading was weaker that expected. Moreover, the number of unemployment claims jumped to 304k from 279k in the previous week – a reading above expectations.

A chunk of poor reports resulted in a weaker dollar. Although the reports don't alter long term view on the Federal Reserve plan to rise rates in mid 2015, it may spark a short term correction of the dollar. As a result, the EUR/USD and GBP/USD posted gains.

Zloty strengthened

A higher chance for a permanent peace in Ukraine and hope for a final solution for Greece (more on these issues in our morning commentary) reduced two major risk sources in the market.

As a result, the zloty extended gains against it major pairs except the pound. The Polish currency may continue to gain if report on GDP growth and inflation on Friday are favorable. The frank should stabilize below 4 zloty and the euro below 4.20 zloty.

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