Afternoon analysis 14.04.2016:
Eurozone inflation slightly above the forecast. The dollar gained on the inflation data. The Bank of England warned the Brexit risk is already weighting on the economy. The zloty remained under pressure.
As expected the Bank of England left interest rates unchanged at record 0.5 percent and minutes showed the decision was unanimous. More importantly, the BOE released its assessment of the impact of the Brexit referendum on the economy. The central bank said that the risk regarding a possible exit from the EU is already negatively affecting the economy. A negative scenario would affect the pound and the stock market. As a result, the pound extended losses, which started on Wednesday.
The final reading of inflation in the eurozone was little above the forecast. The HICP index growth stood at zero percent against negative 0.1 percent in the flash estimate. Last month it stood at negative 0.2 percent. The core inflation data was in line with the expectations. The gauge that excludes volatile prices of food and energy stood at 1 percent against 0.8 percent in the prior month.
Although a higher inflation reading is positive for the currency, it was not enough to affect the broad market sentiment. It is not very likely the ECB will decide to adjust its stance in the near future as it has provided additional stimulus in March. Given the situation, slightly higher or slightly lower inflation is will not force the ECB to alter its stance.
In a last few days the Frankfurt-based institution had to address the critique from the German lawmakers. The German finance minister Wolfgang Schaeuble said the loose stance of the ECB evaporates savings value and spurs support for populism. Bundesbank President Jens Weidmann responded that similar comments pose threat to the independence of the central bank which strives to fulfill its inflation goal. Dutch Central Bank President Klaas Knot supported Weidmann's comments.
Given the increase of negative assessment of the ECB's actions among the major eurozone countries, the central bank may limit comments signaling a possible additional actions. As a result, the negative pressure on the euro may be limited.
The US inflation
The inflation report in the US missed the expectations. The CPI stood at 0.9 percent against the 1.1 percent forecast. Last month the inflation rate stood at 1 percent. Moreover, the core inflation was below the forecast. The gauge after excluding volatile prices of food and energy stood at 2.2 percent against the 2.3 percent that was projected.
After the released the dollar dropped. As a result, the EUR/USD recouped today's losses. Optimistic report on the labor market did not support the dollar. The number of unemployment claims dropped to 253k against the 270k that was projected. It was the lowest reading since 1973.
The Fed Chair Janet Yellen said recently that the inflation rebound could have been only transitory. In an interview for the Time magazine she said the monetary policy should be very cautious. These have been rather a dovish statements.
Grażyna Ancyparowicz from the MPC confirmed the basis scenario for the monetary policy which assumes rates stabilization (source Rzeczpospolita). Ancyparowicz said that interest rate cut could be possible if capital inflow poses risk to the financial sector stability, but a similar scenario is not very likely. She also said that the government social program will support the inflation rate.
The zloty remained under pressure in spite of supportive atmosphere in the broad market. The emerging market currencies were rather weak, but the zloty was clearly under-performing. Given the situation, we may expect a prolonged period of the zloty's weakness.
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