Afternoon analysis 14.03.2016

Solid numbers from the eurozone industry. The oil price resumed declines. The zloty is stronger after the MPC meeting.

The European Central Bank determined market developments. Just after the Frankfurt-based institution released its decision the market wobbled, but later the market sentiment was quite good.

Last Thursday, the ECB cut all the major rates on record. Moreover, it increased the monthly level of asset purchases to 80 billion euros and included corporate bonds in the program. Finally, the ECB will conduct four tenders of cheap loans.

Today's data from the eurozone industry was better than the forecasts. Production increased by 2.8 percent on a monthly basis against the 1.6 percent forecast. Moreover, the numbers from the previous month were revised upwards. The latest reports from the eurozone were rather weak. The sentiment indexes were rather low and signaled deterioration in the manufacturing sector.

However, today's numbers showed that the slowdown would have been only transitory. This factor, coupled with the ECB’s looser stance, may result in a better market sentiment in the longer term.

The Fed's decision

Currently, the market’s attention switched to the Federal Reserve's decision on Wednesday. The US central bank is expected to leave the rates unchanged. The major issue will be the refreshed expectations concerning the Fed's next moves.

Although the US economic developments are quite positive, the latest data on wages were disappointing. Without stronger growth of wages, household consumption alone will not support the inflation rebound. Wages remain subdued in spite of a strong labor market, rising employment and low unemployment rate.

As a result, the Fed may signal a slower pace of interest rate hikes than previously expected. A similar scenario would support demand for risky assets. As a result, the rebound in the stock and commodity markets would continue. Moreover, the emerging market currencies would also gain. The dollar may decline, but the move would be limited.

The zloty may strengthen

The oil price declined in spite of a positive market sentiment. It was due to information that reduced the probability of agreement on output freeze. Iran said that the nation will back the agreement if it increases the output to 4 million barrels a day.

The stance of Tehran hit oil prices. As a result, the commodity currencies declined. The Russian rouble resumed losses. Today the USD/RUB gained 1.2 percent. The Norwegian crown and the Canadian dollar also declined.

The National Bank of Poland cut the inflation forecast (to minus 0.9 percent - plus 0.2 percent and increased the projection for GDP growth (to 3-4.5 percent). In spite of low price growth, the MPC is not willing to adjust the level of interest rates. A hawkish stance of the monetary authorities resulted in a stronger zloty. The move continued on Monday.

The ECB's actions and the MPC's stance supported the zloty. If the Fed shows a rather loose stance, the Polish currency may extend its recent gains.