Afternoon analysis 13.10.2015:
The dollar remained weak in spite of hawkish comments from the Federal Reserve. The German economy slipped again. Inflation hit the pound. A broad weakness of the zloty.
Once again, the reading from the German economy missed the forecast. The ZEW index, a measure that tracks investor's expectations regarding the economy within six months, posted a significant decline. The index stood at 1.9 points against the 12.1 points in the preceding month. A result above the 6 points that was projected. Last time the ZEW index was as low as 12 months ago.
These were additional negative numbers from the German economy in the last few months. Earlier the readings on international trade and industry have signaled a slowdown in the economy. Moreover, other sentiment measures have suggested mounting weakness.
Ongoing deterioration in Germany is a problem for the European Central Bank. A lack in expansion in the major eurozone economy limits the probability of the ECB fulfilling its inflation goal. As a result, today's data increased the likelihood of more easing from the Frankfurt-based institution.
In the last few weeks the ECB President Mario Draghi has spoken several times about the possible easing. However, the ECB Chief signaled a caveat that the monetary authorities need more data to assess the situation. Thus, more time is required to make a decision.
Benoit Coeure from the ECB said, that the monetary authorities may decide to expand the stimulus. However, a similar move today would be premature.
Surprisingly weak dollar
Although the ECB is cautious in its declarations, some commentators believe the decision may be made before the end of the year. Given the situation, the euro should have declined, but the common currency has posted a winning streak.
In contrast, the dollar has remained weak in spite of hawkish comments from the Fed. During the last few days, the Fed members reiterated their view that the interest rate will increase before the year-end. Today's remarks from St. Louis Fed President James Bullard also pointed at tightening. His view is that a prudent monetary policy suggests the need for normalization.
The EUR/USD increased in spite of the hawkish stance of the Fed and dovish expectations regarding the ECB. Such a discrepancy will need an adjustment, which may be significant.
The pound hit by inflation
The inflation rate in the UK returned to a negative level. In September inflation dropped to minus 0.1 percent (similar level as in April). The forecast was at the zero level. The last time the inflation rate was negative was in the 1960s.
The pound posted a significant decline after the report. The British currency posted a broad weakness against all major pairs. However, the move was surprising. In the last week, the Bank of England said it expects inflation to remain subdued. Given this fact, today's reading will not alter the BOE's plan.
Risk aversion in the broad market hurt the zloty. The Polish currency dropped against all its major pairs except the pound (it was hit by the inflation report). In addition, we see correction in the emerging market currencies after the decline in the price of oil. Moreover, the Chinese reports also affected risk taking (more on the issue in the previous commentary).
Given the situation, the zloty was under pressure. Recently, the Polish currency has been under the influence of weak economic reports and heightened political risk. As a result, the probability of a stronger zloty is currently limited.
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