Afternoon analysis 28.07.2015

, Autor:

Piotr Lonczak

The euro dropped ahead of a key meeting of the Federal Reserve on Wednesday. Greece has started negotiating with a quarrel. The zloty gave away its yesterday's gains.

After a significant increase on Monday, today the EUR/USD returned to declines. On Wednesday the Federal Reserve will announce the decision on interest rates. There is no change expected. However, the Fed's statement will be very important as it will help assess the central bank's plan before its September meeting.

The market consensus is that the Fed will increase interest rates in September for the first time in almost a decade. If a similar scenario is confirmed, the dollar will be strengthened. However, the move will be rather limited, as the September hike is priced in.

In contrast, if the Fed foreshadows that it will postpone the first interest rate hike, the situation will alter. As a result, the dollar will probably decline against the euro and its other major pairs. The FOMC's path for interest rates differs from the forecast of the Fed's economic team. It has been revealed by a mistaken release of the report that should have been classified (more on the issue in our previous commentaries).

Recent reports from the US economy are sending rather mixed signals. On the one hand, the labor market reports are very strong (the number of unemployment claims dropped to the lowest level in four decades). On the other hand, the reports concerning new orders for durable goods and new home sales were disappointing. Consumption is still far from the expected levels, thus the inflation rate is subdued.

The home price index S&P/Case-Shiller missed the forecast. The index increased 4.9 percent. It was worse than the 5.2 percent that was projected. In the previous month the index increased by 5 percent (revised from the 4.9 percent reported previously). Since the beginning of 2014 the rate of house price growth has declined from about 10 percent to 5 percent currently.

First problems

Greece has just started negotiations and the first problems have occurred. On Monday the Greek Ministry of Finance said the government has already implemented all the bills needed to sign a deal with the creditors. But the creditors responded that the nation still has a set of reforms to implement, before getting any money from the bailout program.

Greece needs to come to an agreement with the creditors in the next two weeks to secure the country's next debt obligations. The nation will get 86 billion euros in exchange for reforms. Greece must repay 3.2 billion euros to the European Central Bank due on 20 August.

The fact that there is not much time left to sign a deal, and the unpredictability of the Greek counterpart, poses a significant risk for the markets as Athens may try to pressure the creditors during negotiations. Moreover, the credibility of Athens has recently deteriorated due to the confusion concerning the former finance minister. Allegedly, Yanis Varoufakis planned a parallel currency system and violated the law during his work.

The zloty dropped

Declining oil price hurts the currencies of commodity countries. The price of oil dropped to 46 dollars, the lowest level since the end of March. The rouble was hit by the decline of this commodity. The USD/RUB exceeded the 60 dollar level for the first time since March. As a result, the central bank may decide to postpone interest rate cuts. Earlier it was expected to cut rates on Friday. The Russian monetary authorities try to ease credit conditions to help the growth, but they also try to balance the risk of higher inflation due to the currency plunge.

Alter a significant increase on Monday, the zloty dropped today. The Polish currency is weighting the expectations before the Fed's meeting. If the Fed confirms a rate hike in September, the zloty will extend its decline.

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