Afternoon analysis 22.05.2015:
The Schaeuble's remarks on Greece introducing parallel currency hit the euro. An unexpected rise in inflation strengthened the dollar. The zloty moved lower as risk aversion was mounting.
There was no breakthrough at the Riga summit in the Greek case. Still, the comments from politicians were rather calming, what suggests that a deal will be finally reached in the near future.
Germany and France expect the agreement is signed until the end of month. The Greek governments sees the deadline as a feasible one. The government's spokesman said that the most indebted country is going to reach an agreement within 10 days. Moreover, he said that Athens are willing to fulfil commitments towards country's international creditors due June.
Nevertheless, investors' attention shifted to information that the German finance minister Wolfgang Schaeuble suggested Greece to introduce parallel currency. The information was given by the Bloomberg agency citing the unofficial sources.
The official stance of Berlin is that Greece will stay in the euro zone. However, given Schaeuble's remarks, the speculations were invoked that Germany is preparing for the worst case scenario. This factor has negatively affected the euro on Friday.
The US inflation increased
Anyhow, the EUR/USD was severely hit by the inflation data from the United States. Rise in the pace of prices was higher than expected, what suggest the likelihood the Federal Reserve meets its inflation goal will be sooner than later.
The core inflation rose 0.3 percent, the highest level since January 2013. A result above 0.2 percent that was forecast. The measure excludes the impact of volatile prices of gasoline and food, thus it reflected a broad based price growth. Moreover, the overall inflation growth stood at 0.1 percent.
Today's release is somewhat surprising. Until now, the consumption data was not indicating that the inflation growth will accelerate. Moreover, the first quarter reports showed some deterioration in the economic expansion, which should have not resulted in higher price growth.
After data was released, the EUR/USD dropped very sharply. The major currency pair declined to the lowest level since the end of April.
Wednesday's FOMC minutes suggested the first interest rate hikes will be deferred to further into 2015. In addition, the primary dealers survey suggested the expectations has been shifted (more about this issue in our morning commentary).
This factor was however not sufficient to allow the EUR/USD to extend increase in the end of week. And the inflation data evoked the opinion that the opinion that the weakness of the US economy in the first quarter has been only transitory. If the coming data confirms a similar view, the EUR/USD may decline further.
The zloty had very unsuccessful week. The Polish currency posted losses against all its major pairs. The zloty was pressured by the anxiety concerning the future of Greece. Today's speculation that country may leave the euro zone have empowered this negative factor. Moreover, the inflation rising in the US may lead to faster than expected interest rate increase, which will be very negative for risk assets.
Finally, the unpredictable result of presidential voting is resulting in heightened volatility in the zloty market. Given the situation, the zloty is in the position to extend losses if at least some of risk factors is not mitigated.
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