Afternoon analysis 27.07.2015:
The euro increased after the Fed's forecasts are published unexpectedly. The zloty gained against all its major pairs in spite of a spike in the risk aversion in the markets.
It is possible that the expectations for the Federal Reserve plan to increase interest rates will have to be modified. The official forecasts of the central banks differed from the accidentally released forecast of the FOMC's economic team.
It turned out that the Fed economic team sees only one hike this year. However, the Fed has been talking about two hikes. Moreover, the rate path expected by the economic team is flatter than the path presented in the Fed's macroeconomic forecasts.
As a result, the EUR/USD posted significant gains. It is very likely, the move will continue until the Federal Open Market Committee releases its decision on rates on Wednesday.
Moreover, the EUR/USD was supported by the economic reports. In the morning, the Ifo index was released. The major economic sentiment gauge in Germany exceeded the forecast. Later, the US reports were released. The report on durable goods orders was better than it was forecast, but the numbers from the previous month were revised down. As a result, the report was neutral for the major currency pair.
Greece launches negotiations
On Tuesday, Greece will start talks that will shape the ultimate agreement on the bailout program. The nation is going to receive more than 80 billion euros in exchange for a set of reforms that will help to secure the country’s financial stability and restore competitiveness.
Athens must repay 3.2 billion euros to the European Central Bank due on 20 August. Thus the Greek government cannot afford any delays. However, the risk of a slippage is quite high. Part of the Syriza party is against the reform plan expected by the international creditors.
Today the Ekathimerini paper said that the former Greek Finance Minister Yanis Varoufakis claims he was authorized by Alexis Tsipras to create a plan for introducing a parallel currency. The information showed that the Greek Prime Minister has been considering a variety of solutions for his country. As a result, the risk that Athens will make an unexpected move is still significant and should not be ignored.
In the early hours of Monday morning the zloty declined. The Polish currency was affected by the risk aversion. The major source of the risk was the situation in China. The Chinese stock market dropped today 8.5 percent (the largest decline since 2007). Moreover, the news from Turkey was disturbing and negatively affected the emerging market currencies. The nation increased its effort in the war against ISIS. As a result, the risk of further destabilization in the region increased.
Later, the zloty managed to recoup earlier declines against all its major pairs. The Polish currency kept gaining in spite of visible risk aversion in the stock markets.
The situation reflects that the zloty is driven by the expectations concerning the Fed. If the prospect of an interest rate hike is deferred, the zloty may continue to gain. If a similar scenario is confirmed on Wednesday, the Polish currency will probably extend gains.
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