The ECB raised its GDP projections but lowered that of inflation. According to Mario Draghi, the general situation with regards to inflation remained virtually unchanged. Low volatility in the EUR/USD translated into a stable zloty.
ECB left the interest rates unchanged
In line with expectations, the European Central Bank left both the interest rates and the asset purchase program unchanged. In the statement to the decision, however, a phrase suggesting further interest rates reductions was deleted, so the sentence only said, “the Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases".
This could theoretically point to a more hawkish tone. In the later part of the statement, however, it still said that the asset purchase program will be run until the end of December 2017, “or beyond, if necessary.” Taking into account the comment from the ECB members that one shouldn’t expect interest rate increases before the aforementioned program ends. The ECB stance remains ultimately very dovish.
EUR/USD fell very marginally from 1.124 to 1.122 directly after the statement was released, nevertheless, the omission of the part of further lowering the interest rates could have suggested an opposite movement. However, a slightly larger reaction could be seen when the new inflation (HICP) projections were presented which were lowered to 1.5% in 2017, 1.3% in 2018 and 1.6% in 2019. Mario Draghi, the president of ECB, justified the downward revision by decreasing food and oil prices.
Draghi, however, assessed that with regards to inflation, nothing really changed because the underlying inflation (excluding the prices of food and oil) remains flat. On the other hand, the ECB made an upward revision to its GDP projections by 0.1 percentage points in every year between 2017 and 2019. He also evaluated the risk to the economic growth as “balanced”.
As a result, today’s ECB stance could be taken as a relatively hawkish one. According to Draghi, the risk of deflation has virtually gone, similar to the risk to the euro area’s economic growth. This should support the euro, despite the lowered inflation projections, which were caused by relatively volatile factors (food, oil).
Small changes to the zloty
The Polish currency has remained in a slightly worse condition even before the ECB publication and conference. As we pointed out earlier in today’s analysis, this could possibly be caused by a strong drop in oil prices which even deepened around midday.
The ECB’s decision and the later press conference hasn’t brought about any large movements in the zloty’s trading – EUR/PLN remained close to 4.20 while USD/PLN to 4.74. Low volatility was probably caused by a relatively limited muffled reaction seen in EUR/USD. The relation of the euro to the dollar falling below the 1.12 level during the afternoon trading could pose a risk to the Polish currency. In such a case, the zloty could lose value.
There are no significant events planned for tomorrow. The market will most probably digest the UK election outcome. However, at 10.30 a.m., the Office for National Statistics will publish data regarding April’s industrial production and trade balance. The production in the industrial sector grew by 4.3% YOY in December, which was the highest growth rate in over six years. Since January, however, the rate of increases started to drop and reached 1.4% in March.
The median of market expectations suggests that production will even decrease by 0.4% in April. The growth rate of its biggest component – the manufacturing production, is estimated to decrease to 0.7% YOY from 2.3% in the previous month. The consensus is that the trade deficit will decrease from 13.44 billion in March (the largest deficit since September 2016) to 12 billion pounds.
Although the aforementioned data could have limited impact on the pound, after the post-election emotions have cooled down, they could prove important to the pounds valuation. A better than expected reading of industrial production and trade deficit coupled with a decisive win of the Conservative Party could cause the pound to appreciate and move GBP/USD above the 1.30 level and GBP/PLN close to the 5.00 boundary.