Afternoon analysis 05.01.2016

The inflation from the eurozone is below the forecasts. The EUR/USD dropped in today's report. The zloty remained under pressure.

The latest reports from the eurozone showed improvement in the economic situation. The yesterday's PMI indexes were very positive. A broad measure for the monetary union increased to the highest level since April 2014. A somewhat positive tendencies were showed by indexes of production and orders. Expansion is apparent in the labor market.

Moreover, there was some improvement in the employment situation. Today's data revealed positive tendencies in the labor market. In December unemployment in Germany dropped unexpectedly by 14k. It was twice the expected amount. Similarly, report form Spain was very positive. The unemployment dropped by 55.8k against 53k that was forecast. In the prior month unemployment dropped by 27k.

Given the improvement in industry and in the labor market, it is more apparent that tools the European Central Bank has introduced since mid 2014 started to work. There is also clear improvement in credit demand. Credit for private sector has been rising since the first quarter of 2015.

Inflation missed the forecast

Although situation improved in many parts of the economy, there was still no breakthrough in the inflation rate. Today's flash report on inflation was below the forecast. The price growth stood at 0.2 percent against 0.4 percent that was expected. Moreover, core inflation data also was weaker. The price measure that excludes volatile prices of food and energy stood at 0.9 percent against 1 percent that was expected.

On Monday data from Germany suggested, that eurozone inflation may miss the forecast. Given the situation, the probability that the ECB will fulfill its inflation goal in the mid term dropped. As a result, speculations that the ECB may expand its bond buying program will intensify.

Earlier, rising core inflation was the argument for the hawkish part of the ECB against more stimulus. However, the argument has deteriorated. Rising expectations that the ECB will do more to spur inflation have been reflected in the EUR/USD decline. The EUR/USD near 1.0750 was the lowest level since 3 December, when the ECB's lack of action supported the euro. The next ECB meeting is scheduled on 21 January.

Zloty pressured

Risk aversion prevailed in the broad market. The market was nervous as the Chinese situation deteriorated further. On Monday stock trading was halted due to seven percent slide. And today agencies informed that government intervened in the market. In spite of that, the market posted declines. Moreover, the information that stock sales ban will be kept did not support the market.

Additional risk source is the turmoil in the Middle East, that results in heightened volatility in the oil price. This channel negatively affects the stability of the currencies from oil exporting countries. Today the Russian rubble resumed its decline. The USD/RUB stood near its record low level.

Andrzej Kazmierczak for the Monetary Policy Council said the Federal Reserve decision to raise interest rates may negatively affect the zloty as capital may leave the Polish market (PAP source). Andrzej Rzońca from the MPC said there is no space for additional interest rates cuts.

The zloty remained under pressure. Adverse atmosphere in the broad market coupled with negative data (inflation was lower than the forecast) increase the probability of further decline of the zloty.