Afternoon analysis 26.02.2016:
Weak inflation data increases pressure on the European Central Bank. The German government is against additional stimulus. The dollar gained on the GDP data.
The latest data on inflation increased pressure on the European Central Bank to add to stimulus. The inflation rate in France stood at negative 0.2 percent against the 0 percent forecast and 0.2 percent, in the prior month. The report from Germany also missed the expectations. The inflation growth stood at 0 percent against the 0.1 percent forecast and 0.5 percent in the prior month.
The German authorities argue against additional monetary stimulus. The latest comments from Bundesbank President Jens Weidmann, were focused on the long term risk stemming from a too loose monetary stance. The German central bank president sees an ongoing recovery in the eurozone. Today, Wolfgang Schaeuble presented a similar stance.
Before the G20 meeting, the German finance minister criticized a coordinated stimulus package. Earlier, the International Monetary Fund pushed to introduce a global economic stimulus. Moreover, Schaeuble said the potential on monetary policy has been exhausted. He said that current economic issues should be addressed by structural reforms.
The next ECB meeting is scheduled on the 10th of March. In January, ECB President Mario Draghi announced that the monetary policy might be reassessed in March. Given the situation in commodity markets and recent deterioration of economic reports, it is very likely the ECB would add to a stimulus. Currently, the probability of inflation rising back to the ECB target is rather low.
In spite of Germany's reservations, the ECB would rather pursue its plan to increase stimulus. The Draghi's case has been supported by the recent deterioration of an economic situation, a drop in commodity prices, and heightened market volatility. Tools considered, are a lower deposit rate or a widening of the asset purchase program. This factor negatively affects the euro.
Dollar gained on the GDP report
Revised data on the US GDP was better than expected. In the last quarter of 2015, the US economy grew at a one percent pace (annualized) against the prior estimate of 0.7 percent. However, the result is weaker than two percent in the third quarter.
A stronger than expected result was due to a revision in inventories. In contrast, consumption was weaker than the initial estimate. All in all, the US economy will likely accelerate as the consumption increases, due to strong labor market and low gasoline prices.
Today's data increased the probability of interest rate hikes in the US. As a result, the dollar may increase before the March meeting of the Fed. The EUR/USD dropped after the data was released.
The market sentiment improved on the dovish comments from the People's Bank of China. Although there was no precise information on additional actions, a readiness to act was enough to support risk taking. Some possible solutions are lower interest rates, or an adjustment of reserve ratios. Moreover, the Chinese government considers additional fiscal measures.
Friday's sentiment improvement was limited. In the second part of the session, stock indexes gave away morning gains. Similar developments were in emerging market currencies.
As a result, the zloty gave away some of its Thursday's gains. The Polish currency performed weaker than the Hungarian forint. Recently, the situation was rather opposite. However, in the longer term the zloty may perform better than the forint, as the Hungarian Central Bank may cut interest rates.
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