Afternoon analysis 06.04.2016

The market sentiment has deteriorated after a brief relief. The EUR/USD dropped before the March minutes from the Fed meeting. The zloty gave away its recent gains.

The German industry performed better than anticipated. Production dropped 0.5 percent on a monthly basis and increased 1.3 percent year on year. The forecast was for a 1.8 percent drop and a 0.4 percent gain, respectively. However, the prior month’s data was revised down to 2.3 percent and 1.8 percent, respectively. The report might suggest some improvement in the euro zone economy. However, the pace of growth is still rather low.

The optimism regarding the monetary union was deteriorated by the retail PMI index. It dropped to 49.2 against 50.1 in the prior month. A reading below the 50 level suggests a contraction. Still, the report was ambiguous. The situation has improved in Germany, whereas it has deteriorated further in France and Italy. All in all, the report suggests drop in consumption, which may limit the inflation rate.

Brief optimism

Today's data from China surprised positively. The service PMI index increased to 52.2 against 51.2 in the prior month. The forecast was for a 51.4 reading. In the last week, the PMI index for industry showed some improvement. At the beginning of the year, the market situation was determined by the Chinese anxiety. The latest reports show that although there are still some problems, the situation moved in a positive direction.

Better than expected reports briefly supported the commodity market. Yesterday, the oil price increased. It was supported by information that the agreement regarding output cuts may be reached without Iran, which is not willing to limit production as it has recently returned in the markets. The meeting of oil producing countries (including OPEC) is scheduled in mid-April. Still, today oil and copper resumed losses.

The final outcome of today's session will be determined by the FOMC minutes. If the release shows the Fed will pursue the plan to tighten the policy, the dollar may gain and the sentiment may deteriorate.

However, the market reaction may not be standard. The March FOMC meeting resulted in a cut of forecast for interest rate hikes, to two from four, announced in December. It was considered a dovish signal. But now, the futures market shows at most, one hike in December, while the Fed officials have been speaking about two increases. As a result, if the Fed supports a scenario for two hikes, it may be considered rather hawkish.

Zloty resumed declines

The Monetary Policy Council left rates unchanged. The main rate stood at 1.50 percent - the lowest level in history. Last time the MPC cut rates was in March 2015.

Although the decision did not surprise analysts, the NBP President press conference will be more important. One can expect that the MPC will confirm its restrictive stance. Although the latest inflation data was lower than expected, the other reports suggest an ongoing expansion. The MPC may adjust its stance only if the economic situation deteriorates significantly. However, a similar scenario is not very likely.

The zloty extended yesterday's drop as the negative sentiment strengthened. Nevertheless, recent losses may be limited if the MPC confirms rather a hawkish stance.