Afternoon analysis 11.03.2015

The euro extended losses. Improvement in market sentiment has been exploited by the zloty to recoup some of yesterday's drop. Mario Draghi said that the European Central Bank will fulfill its goals.

After spike in risk aversion on Tuesday, today's session is driven by better sentiment. The gains prevail in the European markets. The US markets are also higher, however the range of gains is smaller than in Europe.

Nevertheless, improvement in the market sentiment has not supported the euro. The EUR/USD dropped further and hit 1.0560 – the lowest level since March 2003. Major market drivers haven't been altered. As a result, the major currency pair is set to exceed losses, at least until next Federal Reserve decision on the interest rates.

If the Federal Open Market Committee decides to drop “patience” in its statement, that would lead to significant dollar increase. However, if the FOMC decides to maintain its current policy, the EUR/USD may face significant correction.

Draghi confident in QE

The FOMC meeting is scheduled next week. Until then there is lack of important events in calendar, that would alter the expectations for interest rates change in mid 2015. Tomorrow retail sales numbers are due. The report is important, because consumption sum up to about 70 percent of the US economy. However, given a strong momentum in the labor market, even a negative result won't change the outlook for interest rates.

For the first time since the quantitative easing has been launched in the euro zone, the ECB president Mario Draghi had public appearance. ECB chief reiterated his statements made during press conference after recent decision on interest rates. Draghi said that he is certain that the ECB will fulfill central bank's goals and he assessed that the impact of ECB's actions is positive for the economy.

Draghi pointed out that the drop in bond yields takes place no only in core euro zone countries, but even in countries with fiscal difficulties. Thus, the contagion effect due to Greek turmoil is limited, what is clearly a positive development. However, Draghi's complacency given current market situation, added to pressure on the euro.

Zloty recoups losses

Improvement in broad market sentiment resulted in a stronger zloty. The Polish currency gained against the euro, frank and the pound. However, the zloty remained weak against the dollar – the USD/PLN hit 3.92 – the highest level since May 2004.

The discrepancy between the ECB and the Fed policies will determine developments in the currency market in the longer term. As the result, the USD/PLN will rather extend gains, in spite of short term corrections. Nevertheless, the zloty may gain against other major currencies, if the broad market environment is favorable for risk assets.