Afternoon analysis 27.01.2016:
Rising EUR/USD reflects the expectations for a dovish statement from the Federal Reserve. Yves Mersch from the European Central Bank sees the banking system more resilient than before the public finance crisis. The zloty returned to declines.
Wednesday's statement from the Federal Open Market Committee may determine the market situation in the short term. The EUR/USD has been increasing since the beginning of the week. The major currency pair gained as the expectations mounted that the Federal Reserve may show a more loose stance (more in the previous comment).
The latest market developments support a similar scenario. The key issue is heightened volatility in the Chinese markets, which may reflect deterioration in the economy. Moreover, the macroeconomic reports from China show rising tensions. Other emerging market economies also slowed down. Moreover, the oil price dropped. Oil dropped to the lowest level in twelve years in the beginning of 2016. Given the situation, the inflation growth in the US will remain subdued.
The probability that the US central bank will show more dovish stance is rather low. A revision of the Fed's stance just six weeks after the beginning of the tightening process would deteriorate the central bank's credibility. In this context, the dollar may gain after the FOMC's statement.
During today's speech Yves Mersch from the European Central Bank did not asses the monetary policy. The speech was not important in the context of expectations for the March ECB meeting.
Yves Mersch said the European banks are now more resilient than in the beginning of the European fiscal crisis. The speech reflects rising complacency in the ECB that regards to the overhaul of the banking system.
Stabilization in the eurozone banking system supports the monetary policy effectiveness. As a result, the ECB may expect its actions will be more efficient. It may increase the probability that the ECB will meet its inflation target in the midterm. Currently the inflation rate is around the zero level against the near 2 percent target.
After the ECB released the monetary policy decision, ECB President Mario Draghi said the monetary policy may be adjusted in March. As a result, the next central bank monetary meeting may result in more stimulus. Among possible actions are increase of the amount of asset purchases (currently 60 billion euros) and cut of deposit rate.
On Wednesday the zloty resumed declines. The Polish currency gave away the majority of yesterday's gains against the euro and the pound. It also dropped against the dollar and the franc. The zloty remains near the lowest levels in many years against the major pairs.
Yesterday's report on the GDP growth exceeded the forecast. In 2015 the GDP growth stood at 3.6 percent. The finance ministry said that according to its estimates the deficit in 2015 will remain below the 3 percent GDP level. If the government's expectations are confirmed, the anxiety concerning the Polish public finance stability will recede. In the longer term this factor may support the zloty. However, in the short term the probability of a stronger zloty remains rather low.
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