Afternoon analysis 05.04.2016

, Autor:

Piotr Lonczak

The EUR/USD was steady before the Fed's minutes on Wednesday. Today's releases had no impact in the broad market. The zloty dropped against its all major pairs as the sentiment deteriorated.

Today's data on retail sales in the eurozone surprised positively. It increased 0.2 percent on monthly basis and 2.4 percent year to year. The forecast was 0 percent and 1.9 percent increased, respectively. Moreover, yesterday's report on the labor market showed that the unemployment rate declined to 10.3 percent from 10.4 percent.

In contrast, the service PMI indexes missed the expectations. The broad eurozone index declined to 53.1 from the flash estimate at 54. The largest disappointment was France, where the gauge dropped below 50 - the level which separates expansion from contraction.

The latest eurozone data has shown, that although the situation improves, there is no breakthrough. As a result, the ECB reiterates that it is ready to act if needed (on Monday ECB Chief Economist Peter Praet said the central bank may act). However, dovish comments did not influence the EUR/USD that has been very stable recently.

Fed ready to act

The Federal Reserve official have confirmed readiness to continue the tightening plan. On a Monday, Boston Fed President Eric Rosenberg said he is surprised the markets price in only one interest rate this year (according to Reuters). In his view it was "too pessimistic". And today Chicago Fed President Charles Evans said he sees two interest rate hikes this year (according to Reuters). The latest comments have confirmed the basis scenario, which was published by the FOMC in March.

The market shows that the probability of interest rate hikes exceeds the 50 percent level in December. Given this fact, the recent remarks made by the Fed could have been considered quite hawkish. However, a similar view does not prevail in the markets as the dollar remains rather weak.

Eventually, the discrepancy will need to be removed. The Fed's scenario is being supported by improving reports from the global economy. Moreover, better than expected data on wages resulted in a higher probability that the inflation rate will rebound. Tomorrow's release of the FOMC minutes will be important. If the report shows the Fed pursues its plan to tighten the policy, the dollar may gain.

Weak zloty

Commodities resumed declines. The oil price hit the lowest level in a month as the crude exporting countries have moved away from the deal to cut output. The copper price dropped to the lowest level since March. Moreover, the factor that negatively affected the broad market was comments from the Fed. Currently, it is less important that the tightening path will be flat.

The situation has been reflected in the zloty market. The Polish currency dropped against its all major pairs. However, the situation is rather transitory. If tomorrow's MPC statement confirms rather a hawkish stance of monetary authorities, the zloty will stabilize.

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