Afternoon analysis 03.11.2016:
Positive data from the British economy supports the pound. The zloty remains near its level from Wednesday. The only exception is the pound, which is the strongest against the zloty in approximately one month.
Bank of England strengthens pound
The British central bank left interest rates and the QE program without changes, which was consistent with expectations. Interest rates are at the level of 0.25%, government bonds are at the level of 435 billion pounds and corporate bonds are at the level of 10 billion pounds. The decision from the British Monetary Policy Council was unanimous.
The above decision was followed by the minutes announcement. The BoE does not intend to continue monetary easing. According to the bank’s forecasts, inflation will reach the 2% level at the beginning of next year. However, the announcement also suggests that, “we will only tolerate certain limits of higher inflation target.” Stronger inflation pressure, which has been observed recently, may be an argument in favor of a neutral approach from the BoE. The announcement also states that the central bank may react to economic changes both ways.
The latter option caused the British currency to gain value against the dollar (1.25, which is the highest level since October 7th, which was the flash crash day). However, the Committee members claimed that the pound’s impact on inflation is temporary. Therefore, preventing monetary tightening with this argument may appear expensive (decrease in production and limit in employment growth).
Zloty is relatively stable
The zloty’s quotations remained basically the same throughout the whole day. The euro remained at the level of 4.32 and the dollar at the level of 3.90. The USD/PLN didn’t change after the FOMC announcement. This pair’s evaluation will be determined by the uncertainty regarding the result of the American elections during the forthcoming weeks.
Taking into consideration the dollar’s behavior, the market finds Donald Trump’s candidacy to be more hazardous. Therefore, his positive survey results may cause the American currency to wear-off. On the other hand, a large global uncertainty most often translates to increase in risk aversion, which is harmful for emerging market currencies, including the zloty.
The zloty lost the most against the pound today. The British currency was strengthened by positive PMI data regarding services, as well as the verdict regarding Article 50 of the Treaty of Lisbon in the first part of the day. The message from the Bank of England caused the GBP/PLN to reach 4.8755. This was its highest level since October 6th, which was the day before the flash crash.
Tomorrow’s main event will most likely be the publication from the American Labor Department, which will contain the data regarding the labor market for October. Investors will probably focus mainly on changes in employment in the non-agricultural sector. The market consensus assumes a 175k increase. However, this reading may appear to be disappointing. The ADP data regarding changes in this sector from yesterday (positive 147k) was worth more than expected (positive 165k). Moreover, an increase in employment in this sector has been gradually decreasing since mid-2016. In June, it was at the level of 292k, which is approximately twice as much as an increase from September.
Tomorrow, the Labor Department will also publish the data regarding the unemployment rate for October. The reading from September appeared to be better than expected (5.0% vs 4.9%). The expectations for October are at the level of 4.9%. Even though unemployment in the USA remains at a relatively low level, we have been observing its minor growth over the past few months. The unemployment rate was at 4.7% in May, at 4.9% in June and at 5.0% in September. In its recent announcement, the FOMC emphasized that its members anticipate further arguments in favor of rate hikes in December. Regarding this, if the above mentioned reading is worse than expected, this may wear-off the dollar due to a decreased likelihood of rate hikes.
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