Afternoon analysis 31.03.2016

, Autor:

Piotr Lonczak

A surprisingly dovish Fed shapes the market situation. The EUR/USD hit the highest level since mid October 2015. The zloty exploited positive sentiment in the markets.

The Federal Reserve has moved to a more loose stance. Last Tuesday Fed Chair Janet Yellen has shown quite a dovish stance by saying about possibility of interest rate cuts. Moreover, Charles Evans, the Chicago Fed President, has returned to dovish rhetoric after few hawkish comments.

As a result, the dollar dropped against the euro and its other major pairs. Today the EUR/USD hit 1.14. It was the highest level since October 2015. The tendency has been amplified by the eurozone inflation report that was better than the forecast (the core inflation increased to 1 percent against 0.9 percent expected).

Another important factor needed to keep the current tendency in the EUR/USD market will be speeches of other important FOMC members. Today New York Fed President William Dudley is scheduled to speak after the market trade is closed. If Dudley shows stance similar to Yellen and Evans, the dollar may drop further.

The second major factor is the Friday report from the labor market. The forecast is for 200k increase in non-farm employment. The unemployment rate is expected at 4.9 percent and wages growth is projected at 0.2 percent on a monthly basis.

Yesterday's data on ADP employment change was in line with the projections, which suggest an optimistic reading tomorrow. However, the data on unemployment claims was worse than the expectations. The number of unemployment claims increased to 276k - more than the forecast.

In Friday's data the wages growth reading will be very important. If the figure misses the forecast, the probability that consumption will support the inflation rate will decline. A similar scenario means a drop in the probability of interest rate hikes and as a result, the dollar will stay under negative pressure. In contrast, the sentiment in the broad market may improve.

The zloty exploited positive tendencies

The inflation rate in Poland surprised again. The CSO said the inflation rate stood at minus 0.9 percent on a yearly basis. The market consensus was for negative 0.8 percent. Moreover, the balance of payments numbers were negative. The current account balance in the fourth quarter was negative 427 million euros against the neutral value expected on the basis of monthly data.

In spite of weak reports the zloty had successful session. The Polish currency gained against all its major pairs. Currently, the basis scenario for the zloty is to stabilize with a tendency to appreciation.

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