Afternoon analysis 13.11.2014

Increasing deflation pushed the zloty lower. The Bundesbank reaffirmed its critique of a full quantitative easing and urged on searching other solutions as the EBC unveiled poor forecasts. The US labor market disappointed.

The Bundesbank reaffirmed its defy against a full quantitative easing what encompasses government bonds. The German central bank president Jens Weidmann said in an interview with MNI that this solution would be in a violation of the European law. Moreover, the QE would create wrong incentives and there is no certainty whether this solution would help to spur growth and inflation.

Remarks came after the European Central Bank president Mario Draghi challenged the allegations that his leadership in the Governing Council is questioned at a press conference after announcing decision on interest rates. He also stated a goal of expanding the ECB's balance sheet to 2012 level (up to 3 billion euro) and promised to use additional tools if needed to avert deflation risk and shore up the economy.

Nevertheless, given the remarks form the Bundesbank, the unison in the Governing Council looks less solid than a week before. Although Wiedmann said he sees the need to help economy by monetary policy, he would prefer to choose tools form orthodox framework.

The explosion of optimism after Draghi's words was based on a weak linchpin. There is a vague outlook for a stronger tools provided by the ECB, and the measures used until now are the strongest possible in currency circumstances.

The ECB unveils poor forecasts

Today the European Central Bank unveiled Journal of Professional Forecasters that showed a poor outlook for the euro zone economy. Analysts cut 2014 inflation projection to 0.5 percent from 0.7 percent and 2015 outlook was cut to 1 percent from 1.2 percent. The GPD growth is expected to be at 0.8 percent and 1.2 percent in 2014 and 2015, down from 1 percent and 1.5 percent, respectively.

A deteriorated outlook for the euro zone economy increased the pressure on the ECB to introduce new tools to spur growth, but there are constraints aforementioned.

The EUR/USD today rose but it remained in a narrow corridor 1.24-1.25 since the beginning of the week. The dollar was weakened as the labor market data was worse than expected – unemployment claims rose to 290k from 278k – more than anticipated 280k. Nevertheless, the report don't change the outlook for the Federal Reserves what is expected to rise rates in the mid of 2015 and it may be only used as a reason for a short term moves.

The zloty down after inflation

The Central Statistical Office showed inflation reading that was below expectations. The price growth in October stood at minus 0.6 percent, lower than projected minus 0.4 percent and down from minus 0.3 percent in the previous month.

The zloty is influenced by this data due to the fact that the Monetary Policy Council didn't cut interest rates as expected at its November meeting despite it had seen the National Bank of Poland's forecasts that predicted a low inflation and weaker growth. Thus, the lack of the cut is an even bigger surprise in current circumstances when we know the NBP's report.

If tomorrow's data on the GDP growth also disappoints, the zloty may be severely hit as it will push the MPC to reconsider its latest moves. The GPD growth is expected at 2.7 percent according to Bloomberg survey. It is itself a quite negative forecast and every worse result will push the zloty lower.

Given the latest reports on prices and a negative outlook for the GDP reading the zloty will probably stay under a downward pressure in the short term.