Afternoon analysis 03.03.2015

Stable zloty before the Monetary Policy Council decides on rates. The euro again under pressure. Not the best timing of the European Central Bank.

Rebound of the EUR/USD was very limited. After quite successful first part of yesterday's session, the second part was not good for the common currency. Today the move was reversed. As a result, the EUR/USD dropped to the lowest level since January – not far from the lowest level since 2003.

Market's attention shifts to next day, when reports from the US labor market are scheduled. These reports are important to the Federal Reserve and may alter the interest rates outlook. Moreover, the Monetary Policy Council and the European Central Bank decides on rates.

ECB's timing

Next week the ECB launches its government bond purchases program. The intervention is aimed at spurring the economic growth as a way to fulfill central bank's inflation target (less than 2 percent against minus 0.3 percent currently).

The decision posed many controversies. The major opponent was the Bundesbank that argued every lowering of debt cost will create negative incentives as saving will be used to fill gaps in budgets and defer reforms.

Nevertheless, ECB president managed to introduce the QE. However, program introduction coincides with a clear improvement of economic reports. Firstly, the private credit numbers were better than estimated and earlier the ECB said that credit conditions are improving. Secondly, industrial expansion indexes were improved lately.

Moreover, two crucial reports surprised positively. The unemployment rate unexpectedly dropped to 11.2 percent form 11.4 percent reported previously. And finally, the inflation figures were better than estimated. Deflation rate stood at minus 0.3 percent – a higher result than minus 0.6 percent in previous month and more than minus 0.5 percent expected.

Today's report on retail sales in Germany also suggested a shift in the European economic landscape. Consumption increase in the exports oriented economy reveals that Germany's expansion gained another engine. As a result, the overall performance of the euro zone should improve.

The QE plan assumed eighteen months purchases of government bonds up to 1.1 trillion euro. Some ECB policymakers suggested that the intervention may be extended if needed.

However, recent reports suggest that the euro zone economy is gaining momentum. As a result, extension of the QE is less probable and even realization of the primary plan may not be necessary. The ECB was delayed in introducing the QE after crisis and likely missed the best moment.

At Thursday's Mario Draghi press conference might be asked whether recent improvement in economic data may affect the QE outlook. If Draghi says that the program may be limited due to economic improvement, the euro may be supported.

Stable zloty

Empty economic calendar resulted in limited volatility as investors are waiting for the MPC decision of rates. A 25 basis points cut is expected. If the MPC meets expectations and suggest more easing, the impact of decision will be neutral. However, if monetary authorities refrains from next cuts, the zloty may increase.