Afternoon analysis 02.05.2016

Bundesbank President Jens Weidmann sees no need for more stimuli. The euro remained strong against the dollar and other major currency pairs. The zloty was rather steady at the low level.

Bundesbank President Jens Weidmann said the pessimism concerning the global economic outlook is overestimated. The German central bank chief said that the GDP growth forecast from the IMF is quite good. The GDP growth is expected at a 3.2 percent pace this year and at a 3.5 percent in 2017. The IMF expects the German economy to expand 1.5 percent this year and 1.6 percent in the next year, a forecast slightly below the Bundesbank's view.

Jens Weidmann said that an assessment of the current growth level from the pre-crisis perspective is not justified. During that period, the growth was supported by credit expansion and asset bubbles. Now, such negative events are not present, thus the GDP growth is more sustainable. And it is not very likely the economic growth rates will exceed the pre-crisis level.

Given the situation, a discussion on possible additional stimulus measures is not justified. A more important issue is to implement structural reforms. Weidmann's speech was hawkish, as usual. However, it did not affect the euro.

Today, the euro moved higher on the economic reports. The PMI indexes from the eurozone countries showed a broad improvement. Last week, the GDP data and the unemployment rate surprised positively. Given the latest data, poor inflation numbers are less important.

On Monday, the euro hit a new high against the dollar. The EUR/USD increased to 1.1492 - the highest level since August 2015. In the second part of the day, the major currency pair dropped slightly but remained near this level. In contrast, the dollar's weakness was caused by the Federal Reserve's quite a dovish stance and recent deterioration of the US economic reports. The largest disappointment was the GDP growth, which was the slowest in two years.

The zloty dropped against the euro

The latest reports from Poland missed the forecasts. Today, the PMI index was lower than the expectations and the suggested deterioration in industry. Earlier, the data on industrial production and retail sales missed the forecasts. Only the labor market data was strong.

The next issue is on the inflation data. The deflation increased to 1.1 percent - which was worse than expected. Weaker data and rising deflation pressure may force the MPC to reassess its stance. As a result, this factor may negatively influence the zloty in the future.

On Monday, the zloty exceeded losses. In the second part of the day the Polish currency was weaker, especially against the euro and the British pound. The probability that the zloty may drop is further increased.