Afternoon analysis 07.04.2016:
A cautious Fed did not support the market sentiment. The dollar gained against the euro after dovish comments from the ECB. The zloty dropped as the risk aversion strengthened.
On Thursday risk aversion prevailed in the markets. All major stock markets dropped. Also, the emerging market currencies posted significant losses. The key factors driving the markets were comments from the major central banks.
Yesterday the Federal Open Market Committee minutes were released. In the March meeting the FOMC left rates unchanged and cut the forecast for hikes in 2016. The newest projection suggests only two increases in this year against four suggested in December. The Fed cited markets instability and weakness of the global economy.
The minutes were rather dovish. The publication cited uncertainty regarding the recently observed inflation rebound. The Committee deliberated on limited tolls to address an economic slowdown given the current level of interest rates near zero. However, there were a few hawkish remarks. Firstly, tow members voted for interest rate hikes. Moreover, some FOMC members said the April meeting would be appropriate to lift rates if the economic reports are positive.
The market reaction to the minutes release was mixed. The situation could have been caused by the discrepancy between the Fed's comments and the market situation. The futures market sees only one hike in December. But the Fed is saying about two increases, which was confirmed by the minutes. Given the situation, the release may be considered hawkish.
The EUR/USD dropped
The second part of the session resulted in a severe decline of the EUR/USD as the market sentiment deteriorated. As a result, the long standing dependency between the EUR/USD and broad market sentiment was violated.
The weakness of the euro was sparked by the comments from ECB Vice-president Vitor Constancio. He reiterated the monetary authorities will do whatever it takes to bring inflation to the target. Earlier ECB Chief Economist Peter Praet made a similar statement. And finally, ECB President Mario Draghi wrote in the annual report that the central bank is determined to fulfill its goal.
The developments in the EUR/USD market reflected the fact investors could have considered the minutes as rather hawkish. On the other side the euro dropped due to dovish comments from the ECB. However, the loose stance of the ECB did not support the broad market sentiment.
On Thursday the zloty posted significant losses. The Polish currency dropped against all its major pairs. Similarly, other emerging market currencies were down as the Fed is pursuing its plan to tighten.
Yesterday's press conference of the MPC confirmed the notion that the Polish central bank is relatively hawkish, but this factor did not support the zloty. Nevertheless, in the longer term a hawkish MPC may support the zloty.
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