Afternoon analysis 18.08.2015

, author:

Piotr Lonczak

The pound gained after the inflation data exceeded the forecast. The dollar increased before the Fed's minutes. The zloty was steady after the labor market data.

The inflation rate in the United Kingdom exceeded the forecast. In July it stood at 0.1 percent on a yearly basis. A result above the zero gain that was forecast. In the prior month it was also flat. However, a more important reading was the core inflation rate. The gauge, which excludes volatile food and energy costs, increased 1.2 percent against the previous year. The reading was above the 0.9 percent that was expected.

Currently, the inflation rate is far away from the Bank of England's 2 percent goal. The tendency will likely hold in the nearest future. Record low commodities prices (the oil price dropped to the lowest level since 2009) and a strong pound are factors undermining the inflation rate. Nevertheless, the BoE President Mark Carney expects the inflation to rebound in the long term and the time for the interest rates raise is approaching.

All in all, the first interest rates hike is still distant and the BoE has to wait for a clear sign of inflation rebound. The labor market expansion may be helpful, as the wage growth is sustainable. Today's reports were seen as factors that increased the likelihood of the interest rates hike. As a result, the pound gained against the dollar and other major currencies. The GBP/USD increased briefly to the highest level since the end of June.

Housing market expansion

Today's data from the US housing market surprised positively. The number of housing starts increased to 1.21 million. It was the highest reading in eight years. In October 2007 the number stood at the 1.2 million level. The reading was better than the forecast and the prior month data was revised up. Whereas, the building permits report missed the forecast.

The dollar increased after the report was released. And tomorrow the Federal Open Market Committee's minutes are scheduled. If the report supports the interest rate increase scenario, the dollar will likely extend its recent gains.

On Wednesday the Bundestag will decide on the financial support for Greece. Although the number of opponents against the Greek bailout program is quite significant, the likelihood of a negative scenario is minimal. In spite of this the Greek crisis lost its influence on the markets, the euro does not exploit this fact. The common currency is continuing its decline.

On Thursday the Greek government will have to settle a payment to the European Central Bank. After that the Prime Minister Alexis Tsipras is going to ask parliament for a vote of confidence. Given the situation, it will lead to a snap election. The opposition parties are not going to support the government, and the internal resistance in the Syriza against Tsipras is quite strong. This factor may affect markets in the future, if radical parties will increase their influence in the Greek parliament.

Weaker zloty

Today's reports from the labor market were quite positive. The employment growth stood at 0.9 percent on a yearly basis. A reading in line with the forecast. In contrast, the average wage increased 3.3 percent against the 3.2 percent that was expected. However, tomorrow's reports on retail sales and industrial production will have a stronger influence on the zloty.

The Polish currency dropped in the second part of the session. The dollar's increase is a sign that the likelihood of an interest rate hike in September has increased. This factor is negative for the zloty and other emerging market currencies. Moreover, Jerzy Osiatynski from the Monetary Policy Council said that there is some space for interest rate cuts.

Currently, the Polish currency is under the influence of the broad market. Hence, even if tomorrow's reports from the Polish economy are quite good, the zloty increase will depend on the Fed minutes. If the US central bank confirms a hike in September, the zloty will probably decline.

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 Sp. z o.o is prohibited.

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