Afternoon analysis 17.02.2015

The zloty was little changed in spite of reports suggesting inflation rebound. Greece and Ukraine marginalized as risk factors in the broad market. The euro gained after reports from Germany.

Lack of agreement between Greece and Eurogroup was easily digested by markets. Although there was some uncertainty at first that hit the euro and stock indexes dropped, the situation was calmed later on. In the second part of today's session, the euro moved higher against the dollar and stock markets increased.

The European Union expects Greece to extend currency bailout as a basis for any further negotiations. The Greek government is consistently against any similar actions. The EU set the deadline on Friday.

However, the rhetoric from both sides is defiant, the likelihood for a final agreement is higher that any opposite scenario that would lead to euro zone dismantle. It seems that market participants accepted that the Greek case will drag on until the latest possible moment.

The impact of Greek crisis has narrowed and is local. Stock market in Athens dropped and government bonds yields soared.

Weak US reports

The New York Empire State index showed some deterioration in the economic landscape. The gauge dropped to 7.8 from 10 in the previous month – a result below expectations. It was next weak report from the US after unemployment claims, retail sales and consumers sentiment readings missed expectations.

Nonetheless, today's reports are not sufficient to change the outlook for interest rates as the Federal Reserve pursues its plan to tighten monetary policy in mid 2015. However, recent reports are capable of creating a short term correction in the market. We currently observe this situation.

Stable zloty

The momentum in the Polish labor market remains strong. Employment increased 1.2 percent in January – more that in the previous month, but slightly less than expected. However, wages growth stood at 3.6 percent – a result above expectations for 3.2 percent.

Record low inflation and solid wages increase strengthens purchasing power of households. As a result, rising consumption is may help to lift inflation from its record lows.

Given current circumstances, the Monetary Policy Council may refrain from steeper interest rates cuts. The monetary authorities said that rates will be cut in March, but the overall amount of cuts remained unknown. Today's report suggest a 25 basis points drop in the credit cost.

If tomorrow's reports on industrial production and retail sales will also exceed expectations, the zloty may post more gains. The impact of Greek and Ukrainian crisis remained tamed, what would help mitigate some of risk aversion. As a result, the zloty may extend its gains against the dollar and stabilize further against the euro and frank.