Afternoon analysis 08.02.2016

Risk aversion returned in the markets. The Sentix index revealed deterioration in the German economy. The zloty resumed declines.

In February the Sentix index missed the forecast. The sentiment gauge dropped to 6 from 9.6 in the prior month. The forecast was for the 9.6 level. The comment to the report stressed the deterioration of assessment of current and future economic situation. The report showed that the German economy cooled. Also the global economy faces slowdown, including the US.

Report concerning the eurozone published in the last week also missed the expectations. The PMI indexes from industry and services were lower than in the month before. Retail sales also were below the forecast. In this context the unemployment rate drop (10.4 percent against 10.5 expected) was not very important as the overall assessment of the eurozone economy has deteriorated.

As a result, the probability that the European Central Bank will add to stimulus in March has increased. A similar scenario was outlined by ECB President Mario Draghi during the January press conference. The ECB chief has reiterated the dovish statements during his latest speeches.

Yellen's testimony

Deterioration of the US data resulted in lower probability of the interest rate hikes in the US. After some disappointing data on the GDP growth, the labor market report also disappointed. Last Friday the employment growth in non-farm sector increased 151k - less than expected and the prior month data was revised down. The Service ISM index was also below the forecast.

The FOMC member speeches suggested that the number of hikes will be lower. In the prior week William Dudley cited several risk factors that may postpone hikes.

In December the Federal Reserve has stated the tightening cycle. The Fed's forecast pointed at four hikes in 2016. However, given the speeches of the FOMC's members and deterioration of economic reports the probability of 1 percentage point hikes has dropped recently. As a result, the dollar will remain under negative pressure.

On Wednesday Fed President Janet Yellen will present report on the monetary policy in Congress. Her statement may provide some insight to the Fed's plan. If Yellen's cites risk to the economy and inflation, the probability of interest hikes in March will be severely limited.

Zloty pressured

Last two weeks were quite good for the zloty. The Polish currency trimmed losses against the euro and the dollar. However, the zloty remained at the low level. On Monday the Polish currency returned to losses. It dropped against all its major pairs.

Risk aversion was strengthened due to the anxiety concerning the future of China and sliding commodity prices. The recent increase of the zloty was only a correction. In the short term the zloty will remain near low levels with tendency to further declines.