Afternoon analysis 16.03.2015:
The euro rebounds before the Federal Open Market Committee key meeting. Poor reports hit the dollar. Improvement in risk appetite strengthened the zloty.
The Federal Open Market Committee is expected to drop “patience” from its statement. This is the most probable scenario for Wednesday's decision. As a result, the US central bank will probably raise interest rates in June (more about expectations for the FOMC meeting in our morning commentary).
A similar scenario will pave the way for the dollar to extend its gains. Nevertheless, on Monday we see some correction in the US currency market.
In the second part of the session the move has been strengthened as today's reports from the US economy disappointed. Production in manufacturing declined 0.2 percent on a monthly basis – a result below expected increase of 0.1 percent. Moreover, it has been the third drop in a row.
In addition, the Empire State Manufacturing Index missed expectations. The gauge stood at 6.9 – less than 8.1 projected and below 7.8 in the previous month. Furthermore, last week reports also disappointed. Retail sales dropped for the third time in a row – similarly as production.
Although the Federal Reserve will not change the plan to tighten the monetary policy due to release of few weak reports, the data has been sufficient to spur a correction in the dollar market. Recently the US currency has reached multi-year highs against its major pair, thus some weakness in the data pushed investors to take profits.
Speculations before the FOMC meeting are prevailing in the markets, what marginalized problems with Greece. Almost a month ago, the Syriza government agreed an extension of bailout funds in exchange for reforms. However, Greece still has not been allowed to use funds as the country must first agree reform plan with its European counterparts.
A meeting on that issue is scheduled this week. Alexis Tsipras's government is attached to its promise to drop austerity policies seen as one of the major causes of country's economic crisis. In turn, the German government is pressing Athens to fulfill nation's obligation to introduce reforms.
Recently the European Commission president urged both sides to end the standoff as the scenario that Greece leaves the euro zone is a significant threat to the European integration. However, recent polls shows that Germans are not willing to help Greece. Poll released by ZDF showed that 52 percent of Germans want Greece to leave the euro zone – up from 41 percent in the previous month study, Bloomberg informed. This factor will pressure the euro after the FOMC unveils its decisions.
Core inflation in Poland stood at 0.5 percent – less than expected. The report has not influenced the zloty, as the Monetary Policy Council said it finished easing cycle. However, the numbers on balance of payment have been supportive for the Polish currency as there was a surplus of 56 million euro against minus 920 million euro expected.
Currently the zloty is under the influence of sentiment in the broad market. Until the FOMC reveals its decision, the volatility in the EUR/USD market will be heightened – similarly as in the zloty market. Nevertheless, as long as the risk appetite holds, the zloty is in the position to extend gains against all its major pairs.
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