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Afternoon analysis 17.09.2014

, author:

Piotr Lonczak

Labor market data provided support for the pound before the independence vote. Euro area inflation rose and eased the pressure on the ECB. The zloty was hit by industrial production report. The markets await the Fed decision.

The unemployment rate in the United Kingdom fell to its lowest in six years. In July it dropped to 6.2 percent from 6.4 percent in the preceding month. The forecast was for the unemployment rate to fall to 6.3 percent. In addition, the number of jobless claims declined 37,200 after dropping 37,400 in the previous month (revised from 33,600). It was a better result than minus 30,000 projected.

Moreover, the wage report was above expectations. Three-month average earnings rose 0.6 percent on a yearly basis after falling 0.1 percent (revised from minus 0.2 percent). The report was in line with expectations. Average earnings without bonuses was up 0.7 percent.

A few weeks ago the Bank of England President Mark Carney stated, that the monetary authorities will decide whether to rise increase rates after assessing labor market developments. Today's data was better than estimated, what supports the case for interest rates increase. The BoE minutes also published today showed that two out of nine MPC members voted for a rate increase on the previous meeting, the same as last time.

Surprisingly, the pound was weakened after the data was published despite the fact it increased expectations for the BoE to increase interest rates. Later the sterling recouped the losses due to the newest surveys showing independence opponents leading before tomorrow's referendum, what is considered a more important factor.

Unexpected inflation growth in the eurozone

In August the eurozone inflation growth stood at 0.4 percent on a yearly basis, the same as in the previous month. Final inflation reading was higher than flash estimate of 0.3 percent. The core inflation growth was 0.9 percent, up from 0.8 percent in the previous month. It was in line with expectations.

Today's data is not sufficient to assess whether the risk of deflation was warded off. Nevertheless, if the tendency holds in longer period, it will ease the pressure on the European Central Bank to use additional tools to support the economy. As a result, the case for the ECB to introduce quantitative easing will be postponed. The ECB didn't introduce the QE due to the Bundesbank defiance, although some commentators saw government bonds purchases as the best way to support the economy.

The ECB tomorrow will allot the TLTRO aimed on resuming credit flow to the real economy. It will be the closeup of the ECB actions undertaken so far – cutting the interest rates at record low levels and launching the asset-backed securities purchases.

Inflation weakened the dollar

Nevertheless, the EUR/USD will be influenced by the Federal Reserve decision on interest rates and its statement (a wider view in our morning commentary).

Today's inflation data in the US weakened the dollar. The inflation growth eased to minus 0.2 percent on a monthly basis and to 1.7 percent on a yearly basis, lower than 0 percent and 1.9 percent expected (Bloomberg consensus), respectively. The core inflation rate fell to 0 percent and 1.7 percent, lower than 0.2 and 1.9 predicted, respectively.

The inflation data send the EUR/USD higher before the Fed statement. If the US central bank shows statement not as hawkish as expected, the US currency will probably extend losses.

The zloty weakened by the data

Today's data increased the pressure on the Polish Monetary Policy Council to cut interest rates. The Polish industrial production fell 1.9 percent in August, below expectations of 0.5 percent (PAP consensus). After taking into account seasonal factors production increased 0.7 percent.

The MPC will cut interest rates in October due to poor employment data, industrial production plunge and exceptionally low inflation. Today Elżbieta Chojna-Duch from the MPC said on TVNBIS that she will propose a 50 basis points cut in the next meeting. In her view one can't exclude more cuts in the upcoming months, what needs to be assess given the Ukrainian crisis and the overall economic conditions.

The zloty was little changed against its major pair. The Polish currency is waiting for the outcome of the Fed meeting.


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 the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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