Afternoon analysis 12.02.2016:
The dollar strengthened after the Fed released its semiannual report on the monetary policy. The US monetary authorities still plan to tighten the policy. The zloty was steady at the low level.
The report on the monetary policy released by the Federal Reserve did not result in volatility spike. Although the dollar eventually rose against the euro, the move was not significant. The US monetary authorities proved that they can manage the market expectations in a smooth way to limit volatility spikes caused by wrong communication.
In the report Fed said it expects the economic situation to evolve in a way that will let it only gradually raise the interest rates. The stance was coherent with the Fed's earlier communication. The Committee said it can adjust the monetary policy. It will depend on the economic developments. The pace of the interest rate hikes may be increased if the GDP growth accelerates or inflation rises. In the opposite situation, the path may be softened.
The speech of Janet Yellen for the Congress also confirmed the actual stance of the Fed. The Fed President said that the labor market is moving to full employment, although some market parameters are still not satisfying. The inflation rate remains low due to drop in energy prices. Nevertheless, the central bank expects the inflation rate will return to the target over the medium term.
Yellen assessed the global economic developments as uncertain. Although there is no risk of severe slowdown in China, the drop in currency reserves may pose some difficulties for the central bank in conducting the exchange rate policy.
The latest developments in the financial markets and in the global economy have been enough to force the Fed to alter its monetary policy. In contrast, the financial markets expect no interest rate hikes this year (according to CME data). The divergence will eventually lead to adjustment that may result in a stronger dollar.
The zloty at low level
On Wednesday the market sentiment improved. The rebound came after the period of uncertainty concerning the European banking system. However, the commodity market and the emerging market slowdown still remain risk to the outlook.
The National Bank of Poland estimated the cost of credit conversion to as high as 44 billion zlotys. The NBP expects if the program is introduced, 70 percent of banking sector will face losses. Moreover, the NBP said the project may limit tax income for the government and will impose negative pressure on Poland's rating.
The NBP estimates shows that the project will be hard to introduce. As a result, the probability that it will be eventually implemented is rather low. If it will be diluted or abandoned, the risk concerning the Polish financial sector will be limited. As a result, the zloty may by supported in the longer term.
Today the zloty remained at the low level. The Polish currency increased only against the euro. If the Fed continues its plan to tighten the monetary policy, it may negatively affect the Polish currency. However, the impact of this factor may be limited by the ECB's plan to increase stimulus in March.
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