Afternoon analysis 18.03.2015

Low volatility before key decisions from the Federal Open Market Committee. The zloty declined despite some upbeat reports. Sweden cuts rates.

Today's decision from the Federal Open Market Committee is expected to determine markets direction in the near future. The base scenario is the FOMC to drop “patience” from its statement. A similar move will pave the way for interest rates hikes in June.

The dollar will gain significant impulse to appreciation – as a result the US currency might extend its multi-year highs against major currencies.

However, a variety speculations have arisen before today's release that doubt the Fed is ready to make the final step before tightening its policy. Some commentators point at recent disappointing reports that may convince monetary authorities to defer decision on rates (more about recent US readings in our previous commentaries).

Moreover, some confusion has been sparked by the Atlanta Fed's report that suggest a significant slowdown in the first quarter of 2015. The release states that the GDP growth may slow to 0.3 percent form 2.2 percent in the last quarter of 2014 (more about this release in our morning commentary). This is a voice against interest rates hikes.

In the second part of Wednesday's session the volatility in the major currency pairs has been limited. Investor's reluctance to make large bets before Fed's decision is well based – the release of the FOMC statement will surely result in volatility spike in the EUR/USD markets and other major currencies, irrespectively from the statement itself.

The FOMC will also publish its newest forecast (for inflation rate, GDP and unemployment rate). The Fed chair Janet Yellen is scheduled to speak a half hour after the released. Market participants will digest new information in the context of the press conference, what will eventually allow them to create fresh expectations for the Fed next move.

Sweden cuts rates

The Riksbank surprised by cutting interest rates to minus 0.25 percent from minus 0.10 percent before the decision. Moreover, the Swedish central bank decided to expand its asset purchasing program by 30 billion krone form 10 billion previously. The decision has been made irrespectively to the official meeting schedule. The policy is planed to be continued until the second half of 2016.

The Swedish krone has been hit by today's decisions. The dollar rose to the highest level in six years. The euro recently has declined against the krone, but the currency is near its highest level since 2011.

Solid reports

Today's data from the Polish economy were quite good. The industrial production growth stood at 4.9 percent – a result above expected 4 percent and more than 1.7 percent in the previous month. However, construction performance has missed expectations.

Reading concerning retail sales was below forecast. Sales dropped 1.3 percent on a yearly basis after gain of 0.1 percent in the preceding month. Still, the decline stemmed from weaker spending on gasoline (it dropped 12 percent) due to oil price drop. Thus, the report's negative impact was limited.

A broader look on recent data from Poland suggests that the economy is in a quite good shape. In the longer term this factor should be supportive for the zloty. Hover, the impact of the data has been limited just after release as the market is waiting for the FOMC decision.

As a result, the volatility in the zloty market is limited – similar to other major currencies. If Fed decides to drop “patience” from its statement, the dollar will post major gains in the short term. It the longer term, the zloty may extend gains against the euro and the frank, if market sentiment is favorable for risk assets.