Afternoon analysis 21.10.2015

, Autor:

Piotr Lonczak

The euro steady before the European Central Bank meeting on Thursday. However, there is little chance ECB President Mario Draghi will announce more actions. The zloty under pressure of political risk.

In the last few weeks the speculations has mounted that the European Central Bank will announce additional action to spur the economy. It was initialized by the recent deterioration in the economic reports. Moreover, the inflation rate returned to the negative level. As a result, the probability that the ECB will meet its inflation goal (near 2 percent) in the short term has declined.

The ECB members has spurred similar speculations. Almost every ECB official sees some space for additional actions if it is needed. However, stronger easing is conditioned on the developments in the eurozone economy. In the current situation, the ECB is going to wait and observe.

However, remarks coming from the ECB has been taken as dovish signals. In this context, very symptomatic was the speech of Ewald Nowotny. He said during conference in Warsaw that the eurozone needs more active policy. However, he was referring to the fiscal policy not to the monetary one.

This shows that investors are ignoring the fact that the ECB has been always restrained in taking additional actions. Moreover, there is still the traditional opponent of easing - the Bundesbank. Recently, the German central bank was not active. It is hard to believer, that it has changed its view on monetary stimulus.

Given the situation, dovish expectations before tomorrow's ECB meeting may have been missed. ECB President Mario Draghi will rather calm expectations and reiterate that more data is needed to better assess the current situation. As a result, the euro may gain.

In contrast, there was no changes in the expectations concerning the coming tightening in the United States. The latest signals coming from the Federal Reserve support the scenario that there will be hike before the end of the year. Given the recent developments, if the ECB's press conference is rather hawkish, the euro may return to gains.

Zloty pressured

The zloty was hit by heightened political risk. Recent polls suggest that the PiS is going to win. The party's economic program is viewed negatively. In addition, lawmakers responsible for economic issues have presented a cheap loans scheme for companies. It may be worth as much as 350 billion zlotys within six years.

Moreover, Henryk Kowalczyk said in the interview with PAP, that the PiS will consider candidate's willingness to cut interest rates when choosing the MPC members. If the party wins the elections, it will name six MPC members. Although the outlook for lower rates is distant, it will negatively affect the zloty.

Currently, the overall scale of decline due to political risk is about 1-1.5 percent. A rebound in that amount is expected, if the elections result is a stable government. Additional factor affecting the zloty is heightened aversion against risk currencies due to coming tightening in the US. The chance for a stronger zloty is limited.

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