Signals from ECB (Daily analysis 25.09.2018)

25.09.2018 13:15|Marcin Lipka

The market reaction after yesterday's speech by Mario Draghi was unjustified. Today, the ECB's chief economist Peter Praet confirmed this. The lira maintains most of yesterday's growths after reports on the imprisoned pastor. The relatively stable sentiment is good for the zloty. The EUR/PLN falls slightly below the 4.30 level.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • A lack of macro data may noticeably impact the analyzed currency pairs.

ECB evokes some emotions

Yesterday afternoon's trade was clearly showing euro appreciation and EUR/USD exceeded 1.1800. This was due to Mario Draghi's speech in the Committee on Economic and Monetary Affairs (ECON). The problem, however, was that the market reaction was completely unjustified, as we wrote shortly after the publication.

In our Monday analysis following the start of the US session, we stressed that Draghi's statements are nothing new. In his speech, he was using data from September 13th (published on the last ECB meeting), and since then there has been no change in terms of inflation. We noted that the market reaction was caused more by the fact that the news agencies highlighted a particular sentence than by a real change in the attitude of the head of the ECB.

Confirmation of this theory (in the case of EUR/USD) was a rather quick return of the main currency pair's quotations to the levels seen before Draghi's speech (1.1750). Today, additionally, Peter Praet, the ECB's chief economist, confirmed our assumptions. "I saw the market reaction yesterday. It retreated a little later, I think it was right because I don't think there would be anything new in our message," Praet said.

Moreover, despite the reversal of the EUR/USD pair, yields on the treasury bond market maintained yesterday's increases. In addition, after yesterday's increases in EUR/CHF, this currency pair continues to move upwards, to the delight of those repaying loans denominated in the Swiss currency. Before midday, the level of 1.1350 was exceeded, which allowed the CHF/PLN to fall to around 3.77. It seems that the main information of the week will be tomorrow's meeting of the Federal Reserve. In our opinion, it should be more hawkish than dovish, and this should support the dollar and yet lower the EUR/USD valuation.

Turkish lira gets stronger

Yesterday, the Turkish lira clearly appreciated (less than 3%). However, this was not a consequence of changes in economic policy, but of reports by The Wall Street Journal about the possibility of releasing an American pastor currently detained in Turkey.

The whole thing has been going on for a long time and during the boom in the lira crisis, it was a sign of worsening relations on the Washington-Ankara line. The "WSJ" reports refer to information from Turkish officials, as well as to the approach that the release of the Evangelical pastor would be important for the Republicans before the US Congress elections. The decision is to be taken before October 12th and is likely to further support the Turkish currency. It is worth remembering, that in this matter we have already had many twists, so the current information should be received with extreme caution.

Slightly stronger zloty

The zloty strengthens somewhat around midday. This is supported by neutral global sentiment and the franc's depreciation after yesterday's statements by Mario Draghi (details in the previous paragraphs). However, it is unlikely that the appreciation will significantly deepen.

The market's play on a more pronounced zloty appreciation may be risky not only because of the possibility of a decline in sentiment in other emerging markets (the zloty will continue to respond like the Korean currency or the Israeli shekel, despite being counted among developed countries), but also because of the risks related to tomorrow's message from the Federal Reserve. As a result, the size of the zloty's appreciation is limited.


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