Afternoon analysis 05.03.2015

Zloty has exploited favorable market environment to extend gains. Unemployment claims disappointed before tomorrow's report from labor market. The ECB revealed details on its quantitative easing program. The euro hit fresh eleven years lows.

The European Central Bank president Mario Draghi press conference pressured the euro. The EUR/USD dropped as low as 1.10 – the lowest level since September 2003.

Next Monday the ECB is to launch its quantitative easing program. Central bank president when asked to what extent the Frankfurt-based institution will buy bonds with negative yields, said that the limit is set by deposit rate. Currently that rate is set at minus 0.2 percent. As a result, the ECB has vast space to conduct purchases. The QE program may be extended if needed.

Newest ECB forecasts are quite positive. After zero rate this year, the inflation rate in expected to rise to 1.5 percent and 1.8 percent in 2016 and 2017, respectively. The ECB is very optimistic on GDP growth – the euro zone economy is expected to expand in 1.5 percent pace this year, and 1.9 and 2.1 percent in next two years.

Today's press conference has taken plane in Nicosia. As a result, there were many questions concerning Cyprus and Greece problems. The ECB president reiterated that the access to central bank's liquidity operations is possible if a particular country's rating is eligible. In the other case, the access is warranted by the positive opinion of Troika assessment.

Mario Draghi said that actions undertaken by the ECB have been efficient. The central bank chief reassured that the goal of bringing inflation near two percent will be fulfilled.

Weaker report

Thursday's data on unemployment claims was the last important reading before tomorrow's crucial report on the employment situation in the United States. The numbers of fillings for unemployed benefits increased to 320k – a reading above expectations and more than in the last week.

However, other reports from the labor market have shown a strong picture of the employment situation. Although the ADP figures on employment change in private sector missed forecast, a revision of data from preceding month has been very significant. Moreover, the service ISM index reveal a strong momentum in the labor market.

Given that, the expectations for tomorrow's figures are positive. A 240k growth in employment is projected, after 257k in the previous month.

A similar result will be supportive for the dollar as the Federal Reserve plan to rise interest rates in mid 2015 will not be altered. The EUR/USD moving down further is likely scenario.

Zloty exploited sentiment

Improvement in sentiment in the broad market – pictured by increases in the European and US stock markets – has been maintained. As a result, the zloty is in a good position to extend recent gains as the appetite for risk assets is strong among investors.

The zloty has exploited a weak euro. The EUR/PLN dropped to 4.1312 – the lowest level since July 2014. The frank dropped to 3.86 zloty. However, the pound has stayed near previous close and the dollar increased to 3.75 zloty.

The Monetary Policy Council decision to cut interest rates and finish easing cycle has put the zloty in a position to further appreciation. As a result, the EUR/PLN dropping further to 4.10 zloty is a probable scenario if the broad market sentiment is favorable.