Afternoon analysis 14.12.2015

The probability of additional stimulus in the eurozone is getting smaller. The zloty gave away earlier gains. The zloty was briefly supported by the budget plan release.

The probability of more stimulus in the eurozone is limited - according to economists surveyed by Bloomberg. About 60 percent of polled experts said the ECB actions are enough to support the return of inflation to the central bank target. Currently inflation is at 0.1 percent, whereas the ECB goal is near but less than 2 percent.

In the early December the ECB decided to extend the asset purchase program and to lower deposit rate. Although the central bank increased the stimulus, the market reactions was negative as investors awaited more decisive actions. The major issue was the ECB decision to leave the amount of purchases unchanged (actually it is 60 billion euros per month).

On Monday, the ECB President Mario Draghi said that tools that the central bank has introduced since mid-2014 are sufficient to fulfill its goals. Moreover, after the recalibration of the policy in December, the inflation rate should return to the target without undue delay - Draghi said. ECB Chief added there is always possibility to adjust the policy.

The notion of an additional stimulus from the ECB is getting less prevailing among investors. This factor may support the euro in the longer term. Moreover, the common currency was helped by today's data. Industrial production increased 0.6 percent against the 0.3 percent that was forecast. In the prior month production dropped 0.3 percent.

As a result, the euro gained against the dollar. The EUR/USD moved to 1.10 level. The move was caused by the deterioration of market sentiment. Given the situation, the euro as financing currency in carry-trade transactions, is gaining. An interest rate hike expected on Wednesday will strengthen the tendency.

Mixed zloty

In the first part of the session, the zloty gained due to domestic factors. The finance ministry revealed the budget plan for 2016 that calmed markets. The major figures were in line with the plan of the previous government. The GDP growth is expected at 3.8 percent and inflation at 1.7 percent.

The most important figure, the deficit, is expected at 2.8 percent GDP. A slightly difference is the nominal deficit at 54.7 billion zlotys - 100 million more than the previous government's assumption. A plan to keep deficit below 3 percent GDP is important signal that the government sticks to financial discipline in spite of increased social spending.

However, in the second part of the day the zloty dropped as risk aversion increased. The data from the NBP did not help the Polish currency. The current account deficit stood at minus 113 million euros against minus 959 million in the prior month and minus 590 million that was forecast.

In the coming days the major factor for the currency market will be the Federal Reserve decision on interest rates. This factor will result in negative pressure on the emerging market currencies. Given the situation, the probability of a stronger zloty is limited.