Afternoon analysis 08.04.2016

The Fed has resumed a dovish rhetoric. The dollar was steady in a narrow range. The zloty exploited the opportunity to recoup some losses.

Today's data showed an uneven expansion in the eurozone. The latest data from Germany suggested some improvement in industry. A positive tendency has been strengthened after the report on international trade. Germany's export increased 1.4 percent on a monthly basis against the 0.5 percent forecast. Import rose 0.4 percent against the negative 0.3 percent that was projected. As a result, the trade surplus stood at 19.8 billion euros against the 18.5 billion euros expected. Rising trade turnover suggests a broad expansion.

However, the market optimism was limited by the French report on industry. Production dropped 0.1 percent on a monthly basis. The result was worse than the negative 0.5 percent forecast. All in all, although the eurozone economy is growing, the expansion is uneven and fragile.

The minutes from the ECB suggested that the monetary authorities stand ready to act. Yesterday's speeches of the major ECB officials supported a similar view. Still, it is not very likely that the Frankfurt-based institution will add more stimulus in the near future. Moreover, the March decision was not unanimous. As a result, the situation may limit a negative pressure on the euro, in spite of remarks suggesting more actions from the central bank.

Dovish rhetoric

Federal Reserve President Janet Yellen defended the December decision to raise interest rates and said the US economy is in quite good shape. In her view, the labor market is closing at full employment. Yellen rebuffed the accusations that the economy is full of investment bubbles. Moreover, Yellen said that the inflation goal is not a ceiling for the inflation - a remark that suggests a rather strong tolerance for heightened inflation.

On Thursday, the current Fed president discussed with her predecessors, Paul Volker, Alan Greenspan and Ben Bernanke. Nevertheless, the remarks made by New York Fed President William Dudley were clearly more interesting. Dudley suggested a gradual path to interest rate hikes, as the US economy is susceptible to many risk factors. Dudley expects that the Fed will miss its inflation target and the inflation expectations may fall. He also cited that some weakness is part of the economy's sectors.

Although Yellen's speech stressed positive factors, Dudley limited optimism. Given Wednesday's minutes, the Fed's stance seems to be quite dovish, with a basis plan to raise interest rates. In contrast, the ECB reiterates that it is ready to act, but it is not very likely that it will eventually take any actions. As a result, the EUR/USD stabilized in a narrow range.

The zloty limited losses

The zloty has had a bad week. The Polish currency posted losses against all its major pairs. It dropped significantly against the euro and the franc. The major factor responsible for the zloty's weakness was risk aversion in the broad market. It was not mitigated by the rather hawkish stance of the MPC that was presented on Wednesday.

Today, the negative sentiment in the markets was limited, which was exploited by the zloty. The Polish currency managed to limit its losses. In the short term the zloty may stabilize, with a tendency to gain.