Afternoon analysis 02.03.2015

The euro rebounded on Monday after some weakening in the previous week as inflation and unemployment data showed some improvement. The zloty rose against all major currencies except the euro. US reports not supportive for the dollar.

The EUR/USD rebounded on Monday after poor previous week. The dollar didn't exploit comments from the Federal Reserve officials that pointed at interest rates hikes in mid 2015 (more on this in our morning commentary). The data on household spending was also favorable for the US currency, but later reports disappointed.

Although the headline numbers on consumer income and spending failed to meet expectations, a deeper look in the data revealed that the situation is improving. The data that takes into account inflation showed that spending improved. Consumption is the biggest part of the US economy by accounting for more than two thirds of the GDP.

Inflation adjusted spending – that takes into account drop in oil and energy prices – increased 0.3 percent after dropping 0.1 percent in the preceding month. Reports that take into account nominal numbers showed a drop of 0.2 percent after a declining 0.3 percent. The PCE inflation reports – the major price growth measure for the Federal Reserve – was in line with expectations (up 0.1 percent on a monthly basis and plus 1.3 percent on yearly basis).

Later the reports were not in favor of the dollar. The ISM index – the major industry sentiment gauge – dropped to 52.9 from 53.5. On Friday the Chicago PMI index suggested a deterioration of expansion. Moreover, the housing spending data stood below expectations.

Stronger euro

Next week the European Central Bank launches its quantitative easing program aimed at lifting up inflation. In the meantime, the deflation rate in the euro zone was less severe than expected. The price index growth stood at minus 0.3 percent – more than minus 0.5 percent expected and minus 0.6 percent in the previous month.

Moreover, the report on unemployment rates was better than projected. The unemployment rate dropped to 11.2 percent from 11.3 percent in last month (revised from 11.4 percent) – a result above 11.4 percent forecast.

Recent week was very poor for the euro that dropped against the dollar to its lowest level since January 26. - a level near the lowest level since 2003. Currently we observe some correction in the EUR/USD, but the move will be rather limited.

Stronger zloty

Today's PMI report from the Polish industry was the last important figure before the Monetary Policy Council decides on rates. The report in a broader scope supports a scenario for 25 basis points cut. A similar outcome will support the zloty, if the MPC signals less willingness to cut the credit cost further.

The zloty was strengthened against all its major pairs except the euro. The increase of the EUR/USD resulted in growth of the EUR/PLN. Nevertheless, this move will be rather brief, thus the zloty should gain against the common currency. If current positive sentiment in the broad market holds and the MPC is balances, the zloty may gain further. The EUR/PLN dropping to 4.10 zloty is a probable scenario.