Afternoon analysis 18.09.2015:
Investors are seeking for a direction after the Fed. The EUR/USD was stable after significant increase on Thursday. Weak economic reports hurt the zloty.
As expected, the Federal Reserve refrained from the interest rate hike. The zero-rate policy was maintained as the Fed pointed at uncertainty concerning emerging market economies. As a result, the economic condition of emerging countries has been included to factors that decide whether the Fed will tighten the policy.
Moreover, the monetary authorities are seeking for confirmation that the inflation rate will return to the Fed's goal in the medium term. Thus, the Fed is hoping to see some more proves that the labor market is getting stronger before deciding to increase rates. Drop in commodity prices were reflected in lower forecast for the inflation rate.
Investor's expectations for a hike has been postponed. The FOMC said in the forecast that rates will increase before the end of the year. The likelihood of a hike in December is 46 percent (according to Bloomberg).
In general, the Fed is pleased with the US economic performance. However, there were some problems. A strong dollar hurts the net export, thus it lowers the GDP growth. Moreover, a low unemployment rate hides the fact that labor force participation rate is very low and there is too many part-time workers.
Thus, investors in the stock markets took the Fed's decision as a negative factor. The FOMC reluctance to hike may be showing that the Fed is not sure whether the economy will sustain current growth pace. As a result, some risk aversion was visible in the stock markets.
The European markets were severely hit. Slowdown in the emerging market economies poses a risk to the export growth. Moreover, a dovish Fed will result in a stronger euro, a factor that will hurt export. As a result, the situation adds to pressure on the European Central Bank to act. Possible solutions are an extension or an increase of the quantitative easing.
Benoit Coeure from the European Central Bank said today that the divergence among the monetary policy in the eurozone and the US will diverge further. The ECB member said, that the ECB may extend the QE if it is necessary.
The Chinese stock market dropped 3.2 percent this week. It was the largest weekly decline in the last month. Investors are selling assets as they worry that the economy will continue to deteriorate and the government interventions will not support the market.
The Chinese turmoil has been a factors that negatively affects the emerging market assets since June. As the Fed refrained from interest rate hike due to emerging markets problems, the Chinese reports will influence the risk assets even more.
After the Fed's decision one could have thought that it will positively affect the Central Easter Europe currencies. On Thursday, the Czech krone and the Hungarian forint increased. Also the zloty gained, but its move was smaller. The Polish currency was negatively affected by the weak economic data.
On Friday, the risk aversion was quite strong. As a result, the probability of a stronger zloty is currently lower, than it had been expected before the Fed statement.
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