Daily analysis 28.04.2016

A neutral Fed calmed investors. However, the Bank of Japan increased market volatility. The zloty steady at a low level.

As expected, the Federal Reserve left interest rates unchanged. The federal funds rate remained in a band from 0.25 percent to 0.50 percent. After the Fed released its decision, the market sentiment improved slightly. All in all, the Fed's stance shown in the statement was rather neutral.

The US monetary authorities see an ongoing improvement in the labor market in spite of recently observed deterioration in other data. Consumption was modest, although household income increased and sentiment improved. The housing market continued to expand, but the fixed investment growth and net exports slowed down. The Fed observes developments in the global economy, as well as the situation in financial markets.

Low inflation growth was due to the situation in the commodity market and a strong dollar, according to the Fed. In the mid-term the price growth will move to the central bank's goal as the transitory factors recede and labor market conditions improve even further. The Fed said that it will adjust the level of interest rates according to economic developments. Given the situation, the central bank believes that the cost of credit will rise gradually.

Volatility in the markets increased briefly after the Fed's statement. Later, the EUR/USD stabilized. The market reaction reflected the neutral stance of the Fed. The probability of a June interest rate hike dropped further to around 15 percent, from more than 20 percent at the beginning of the week. This factor imposes negative pressure on the dollar.

In the longer term, the probability of the EUR/USD rising further moved even higher. The ECB recently said that it is going to wait for the outcome of measures which were introduced. As a result, the probability of more stimulus was limited. Given the situation, the euro stabilized with a some tendency to increase. In contrast, the Fed's stance may result in a weaker dollar.

Surprise from Japan

The neutral stance of the Fed was confronted with a surprising statement from the Bank of Japan. The Japanese monetary authorities did not change the monetary policy. Although the move was broadly anticipated, the most important thing was the fact that the BOJ refrained from additional monetary stimulus in the near future.

The BOJ is not willing to increased the monetary stimulus very soon. This was surprising, due to the yen's recent appreciation, which may hurt the export growth in the trade oriented economy. The Japanese currency moved to the highest level since 2014 against the dollar. The EUR/JPY declined to the mid-2013 level.

Although the Fed's stance may support the zloty in future, the BOJ's statement limited the risk appetite in the markets. As a result, the zloty stabilized at a low level. However, as the Polish currency weakened slightly, the forint gained against the euro and the dollar. The situation reflects the fact that the zloty is currently susceptible to the risk factors.