Afternoon analysis 27.03.2015

, author:

Piotr Lonczak

The EUR/USD wobbled as the US GDP growth and consumer sentiment disappointed. A decline in risk appetite has negatively affected the zloty.

After quite a positive first part of the session, the dollar gave away its gains. The US currency increase had been caused by somewhat hawkish comments from the Federal Reserve officials, who suggested a readiness to pursue the plan to hike interest rates this year. The monetary authority views on the economic conditions are positive, which underpins tightening (more on this issue in our morning commentary).

Recent data on the US labor markets supports the dollar. On Thursday, the number of jobless claims dropped to 282k – a result better than its projection and below the previous reading.

However, the reports released on Friday have been too weak to back the dollar. The final GDP reading missed expectations – the growth stood at 2.2 percent – a reading below 2.4 percent that was forecast. Still, in the fourth quarter the consumption increase posted the best result in eight years.

Moreover, the University of Michigan sentiment index dropped to 93 against 95.4 the previous month. A deterioration of sentiment among households is a negative premise for the consumption growth. In the context of a three-month retail sales decline, it is clearly an unfavorable fact. As a result, the EUR/USD rebounded today – in spite of hawkish comments from the Fed members.

Pound stronger despite housing data

Today's data on the British housing market have confirmed an ongoing deterioration in this part of the economy. The pace of price growth dropped for the seventh time in a row to the lowest level since September 2013. The price growth stood at 5.1 percent on a yearly basis – less than 5.7 percent in the preceding period.

Still, a poor report did not affect the pound, that posted gains against the euro and the dollar, mainly by exploiting the weakness of the US currency.

In turn, the pound was supported by a statement of the Bank of England president Mark Carney, who said interest rate hikes are more probable than a decline of the credit cost. Given the recent data – a weaker than projected inflation growth and very good numbers on retail sales – the Carney's statement is consistent with the BOE stance that diminishes the impact of low inflation and expects the price growth rebound when consumption improves.

Weaker zloty

In the first part of the week the zloty has shown that it has a potential to increase. The Polish currency managed to keep gains even after the risk aversion mounted in the markets. However, the move has eventually lost its pace, as the turmoil in the Near East region resulted in a spike in risk aversion.

On Friday the zloty extended losses in spite of hawkish comments from the Monetary Policy Council Member Andrzej Rzonca who sees no need to keep record low interest rates for too long. To sum up, the zloty is in the position to increase, but only if the broad market sentiment is positive for risk assets. If these conditions are met, the EUR/PLN may drop as low as 4.00 within few weeks.

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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