Afternoon analysis 26.02.2015:
Inflation reports supported the dollar as Fed's Bullard willing to drop “patience”. ECB actions percolate to the real economy. The zloty strengthened only against the euro.
After uncertainty concerning Greece has been removed, and Janet Yellen offered a neutral congressional testimony, investors' attention shifted to macroeconomic reports.
Today's report on inflation in the United States has been eventually supportive for the dollar, however the reports was almost in line with expectations. The consumer price growth stood at minus 0.7 percent on a monthly basis – less than minus 0.6 percent anticipated. Still, core inflation – a measure that excludes volatile food and energy prices – increased 0.2 percent, a reading slightly above projections.
The inflation data was released after hawkish comments from the St. Louis Federal Reserve President. James Bullard said in CNBC that he is willing to drop “patience” from FOMC statement in March, what would allow the central bank to raise rates in summer. The Fed president Janet Yellen said that “patience” means no hikes within two Fed meetings.
Moreover, Bullard said that current rates are 375-400 basis points above normal. The St. Louis Fed president sees unemployment rate dropping below 5 percent in the second half of the year. He said current low inflation, although it is clearly below Fed's 2 percent target, is a result of severe drop in oil and energy prices.
Other reports from the US were more vague. Unemployment claims increased to 313k – more than 282k in the previous week. Durable goods orders increased up to 2.8 percent (more than forecast), but the core orders data (a report excluding vehicles) was below expectations.
To sum up, today's reports were in favor for the dollar. The EUR/USD moved near 1.1210 – the lowest level since January.
ECB is helping
From mid 2014 the European Central Bank introduced a variety of measures to spur credit flow to the real economy. Since then, the central bank cut interest rates to negative level, conducted two TLTRO tenders and launched private assets purchases.
Recently the ECB has signaled, that credit conditions improved in the fourth quarter of 2014. Moreover, in March the Frankfurt based institution will launch government bonds purchases, what will facilitate actions introduced earlier.
The improvement in credit conditions was reflected in today's data. The ECB informed that private credit dropped 0.1 percent – less than 0.3 percent expected and fewer than 0.5 percent in the previous month.
Today's reports from the euro zone give a firm basis for expectations that the economic conditions will improve as the credit flows to the real economy. The full QE starting in March will be supporting the actions undertaken earlier by the ECB. Nevertheless, today's report didn't strengthen the euro.
The zloty is higher against the euro
Although information agencies say that fighting in Ukraine is fading, that does not mean an end of country's problems. The economic situation deteriorates very quickly and there is risk that Russia would cut gas supplies (more about Ukrainian economy in the morning commentary). This factor may affect negatively assets in our region.
A strong increase of the dollar against its all major pairs resulted in a gain of the USD/PLN to 3.70 zloty from 3.65 in the beginning of the day. The Polish currency was lower against the pound and the franc, and posted some gains against the euro.
The zloty's drop would have been caused by the uncertainty concerning the future of Ukraine. Earlier this week this factor was marginalized, but it is clearly gaining importance. Other currencies in our region – the Czech koruna and Hungarian forint – also posted losses. As a result, the zloty's potential to appreciation was deteriorated.
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