Afternoon analysis 03.12.2015

The market volatility spiked as the European Central Bank missed the dovish expectations. The euro gained significantly. The EUR/PLN exceeded the 4.30 zloty level. It was the highest level since January.

Today the European Central Bank decided on rates and the asset purchasing program. The Frankfurt-base institution left main interest rate unchanged at record low 0.05 percent level. The deposit rate was cut by 10 basis points to minus 0.3 percent. It was in line with the expectations.

However, the ECB did not meet expectations concerning the quantitative easing program. The major issue was that the ECB did not increase the monthly amount of purchases against the expectations saying even about a possible 20 billion euros increase. Given the situation, it was less important that the QE has been extended to March 2017 and the scope of eligible assets has been broadened to include municipal bonds.

Moreover, the ECB published revised forecasts for the GDP and inflation. There were no important changes with respect to the growth forecast. However, the inflation outlook was revised slightly down. The revision was coherent with remarks made by Mario Draghi.

The ECB was less dovish than the market expectations. As a result, the euro gained significantly. The EUR/USD increased to 1.0893.

The Fed on track

On Wednesday Federal Reserve President Janet Yellen said that the economy has developed as expected. The labor market reports have shown, that the labor market situation is strong enough to bring inflation back to the target (2 percent on a yearly basis).

Fed Chair supported the tightening scenario. Yellen said that if the FOMC misses the appropriate moment for tightening, in future it will have to rapidly increase rates. A similar scenario would result even in recession.

Yesterday Atlanta Fed President Dennis Lockhart also supported the case fir tightening. In addition, the Beige Book, a report on the economic developments in particular states, showed a modest growth and rising consumption. Positive tendencies were also visible in the wage numbers. The factor will support retail sales.

Limited actions from the ECB resulted in a stronger euro. As the euro gains, the probability that the Fed will raise rates is going up. Earlier, the rising dollar was a hurdle for the Fed as it weakened the US export growth. As the factor is less important, the Fed's scope of actions broadens.

Mixed zloty

The ECB's decision increased volatility in the currency market. The EUR/PLN moved briefly above 4.31 zloty. It was the highest level since January. However, the zloty gained against the dollar, the pound and the franc.

In theory, a stronger stimulus from the ECB (even if it missed the expectations) will support the zloty. Cheap financing may push investors to seek profit in high-yielding emerging market currencies. However, the factor that may limit positive influence of the ECB actions will be tightening in the US.