Afternoon analysis 21.09.2015

A rising discrepancy between the Federal Reserve and the European Central Bank determines market developments. The euro exceeded a decline against the dollar. In the second part of the day the zloty gave away earlier gains.

France may negatively affect the market sentiment. Last Friday Moody's Investors Service cut the nation's credit rating. The credit worthiness was lowered to Aa1 from the previous Aa2 level. The rating's outlook was set stable.

Moody said the decision was due to weak economic performance and a small chance that the situation will improve. Moreover, a low GDP growth and institutional constraints will not allow a reduction in the public debt level.

Recently France has been among the weakest performers in the major eurozone countries. The country posted weak industry results (the PMI index and production missed the forecasts), and the GDP growth stagnated. However, Moody highlighted the fact that there is no risk that the nation will default. The French economy is highly diversified and the demographic developments are positive.

Optimistic Bundesbank

The monthly Bundesbank reports were quite upbeat. The German central bank assessed that the Chinese crisis will not significantly affect the economic outlook. In the second part of the year the GDP will continue to expand due to export growth and strong domestic consumption. The high employment level and low fuel prices positively affect household income.

The Bundesbank forecast the GDP growth at 1.7 percent in the whole 2015. It was a slightly lower projection than the government's projection of the 1.8 percent growth.

In contrast, the European Central Bank signaled that it may extend the bond buying program to fulfill its inflation goal. Under the basis plan, the scheme will work until September 2016. However, there were rumours that it will be extended to mid 2017.

Last week, Benoit Coeure from the ECB said, that the monetary authorities may do more to meet the inflation goal. He also confirmed, that a larger QE is on the table. ECB Chief Economist Peter Praet will speak after today's session. One can expect more dovish remarks.

In turn, the Federal Reserve is going to increase rates this year. The latest comments from the Fed members pointed at a similar decision (more on the issue in our previous commentary). Today's speech from the Fed member Dennis Lockhart will likely confirm this scenario. This factor will probably support the dollar.

The discrepancy between the ECB and the Fed will continue to increase. As a result, the dollar will gain while the euro will drop. In the longer term the major currency pair will go lower.

Weaker zloty

Before the Fed's decision to leave rates unchanged, one could have thought that a similar solution will result in a stronger zloty. However, a likewise scenario was not fulfilled. In spite of the broad strengthening of the zloty, we have observed only a small drop of the EUR/PLN (that was limited today). Even dovish comments from the ECB were not sufficient to significantly help the zloty.

Recent deterioration in the economic reports limited the appreciation potential of the Polish currency. However, in the longer term this factor will be limited and the zloty may increase on the ECB's plan to expand the QE.