Afternoon analysis 20.10.2016:
The European Central Bank made no changes to interest rates. The dollar is the strongest against the euro since March. This also caused the zloty to lose value against the American currency.
No surprises from ECB
The European Central Bank left interest rates unchanged, which was consistent with expectations. The ECB Board of Presidents expects interest rates to remain at their current level (or even lower) for a long time, as well as long beyond the assets purchase program.
Mario Draghi said during his press conference, that limiting quantitative easing was not discussed and neither was its extension beyond March 2017. On the other hand, there were discussions regarding how to address the problem of bonds’ insufficiency, if it appears. This may suggest that the ECB will most likely extend the QE program beyond 2017. The bank also sees a moderate and stable improvement in the euro zone’s economy, as well as the gradual growth of inflation. However, the risk of decreases in growth pace remains the base case scenario for the ECB.
Draghi sees the main dangers for growth pace on the outside. Therefore, the ECB will sustain its accommodative monetary policy, which is to take inflation slightly below 2% in the mid-term. Draghi reassured that the ECB will use all possible tools to reach this goal.
Even though the euro was initially strengthening against the dollar above the 1.10 level, the ECB press conference eventually caused the dollar to strengthen. At 15.30 (3.30 PM), the EUR/USD was at its lowest level since June 19th (1.093).
Dollar is the strongest against zloty since the end of July
The result of the dollar’s strong appreciation was a wear-off of the zloty. After the press conference, the USD/PLN was at its highest level since July 27th (3.95). The CHF/PLN increased by 0.5% and the franc’s exchange rate was at the level of 3.99 PLN. The value of the zloty against other currencies essentially remained the same, since it has been experiencing a slight depreciation before the ECB press conference.
It seems reasonable to ask when the USD/PLN will reach the level of 4.00. The last time that this pair was at this level was on July 18th. Recent trends show that the USD/PLN increased from 3.83 to 3.95 between October 10th and October 20th (which is today). Let’s keep in mind that the next FOMC meeting is scheduled for December and there is a 64% likelihood (according to the recent calculations from the CME, which was based on Fed Funds Rate) that interest rates will be raised by 25 base case points. For the time being, it seems quite likely that the USD/PLN would move increasingly closer to 4.00 as the FOMC meeting nears.
There are no events that would significantly impact the markets tomorrow. Investors will most likely discuss Mario Draghi’s press conference.
At 16.00 (4.00 PM), the European Commission will publish the data regarding consumer trust in the euro zone for October. This is one of the leading indexes which forecast the consumer expenses which have a significant impact on the economic situation. The market estimates that this index will improve from negative 8.2 in September to negative 8 in October. This index has been below the level of negative 8 since July. The most recent positive data from the euro zone suggests that the reading will be consistent with, or even better than, expectations. Theoretically, it should impact the euro positively. However, it’s more likely that the markets will still “live out” today’s ECB meeting. Therefore, this publication will not be very significant for the quotations. We could expect a visible reaction on the euro if the data is significantly dissonant from the consensus. However, this was never a common phenomenon.
At 19.00 (7.00 PM), Baker Hughes will publish the data regarding active oil and gas drills in the USA. An increasing reading suggests a growing supply in the market. This, causes a depreciation pressure on oil prices. Last week’s reading was at the level of 432, which was the highest since February. It’s worth noting that the amount of active drills has been gradually increasing since the end of May (316).
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