Afternoon analysis 18.12.2014

The dollar rose after Fed's statement. Next solid reports from Germany. The zloty under pressure despite rouble's stabilization. Solid data propped up the pound.

Recent data from Germany showed that the major euro zone economy is gaining momentum. The Ifo index – the most important growth indicator in the country – rose for a second time in December to 105.5 from 104.7 in the previous month. It continued to move up after rising for the first time in seven months in October. The data follows earlier reports – ZEW index and PMI – that signaled the end of mid year slowdown in Germany.

All in all, the German economy gave some relief before 2015 – the year that may bring an economic breakthrough in the euro zone. In the first quarter the European Central Bank will probably introduce full quantitative easing – asset purchase program than encompasses government bonds – a measure that proved its efficiency in the United States and United Kingdom. Moreover, the European Union is to start a fund that will support investment.

The growth of Germany (and world economy) will be supported by low oil price. This factor was pointed by major central banks.

However, solid data from Germany didn't result in a stronger euro. The EUR/USD fell near its two year low.

Strength of the dollar was caused by the Federal Reserve. Yesterday's decision on the interest rates and statement showed a somewhat hawkish stance of the central bank (a wider view in our morning commentary). As a result, the consensus for interest rates hikes shifted from mid 2015 to the second quarter, what supports the dollar.

In the meantime, the data from US labor market exceeded expectations. Number of unemployment claims fell 6k to 289k – less than 295k expected.

The pound rose after the data

Although Wednesday's data from the UK was supportive for the pound, it didn't post significant gains until today.

Retail sales rose 1.6 per cent on a monthly basis – more than 1 per cent in the preceding period and more than 0.3 per cent projected. It rose 6.4 per cent from previous year – more than 4.4 per cent expected.

A strong increase of consumption was explained by growth of real income of households. Yesterday's data showed that wages rose 1.6 per cent and exceeded inflation growth for the first time since 2009. The growth of households purchasing power will result in higher consumption and it will facilitate inflation's return to central bank's goal.

The pound posted gains against the euro and the dollar. The British currency rose against the zloty – the GBP/PLN went above 5.40 for the first time since November.

The rouble's stabilization

After three days of unusually high volatility, the rouble was stable on Thursday. The currency crisis was stemmed after significant rate increase (to 17 per cent from 10.50 per cent) and interventions of government and central bank in the market.

The Central Bank of Russia announced a plan to stabilize the financial market. The plan is aimed at provide capital and liquidity for financial sector and mitigate capital provisions against bad loans if they are a result of sanctions imposed on Russia.

Moreover, the rouble is supported by rising oil price. The commodity gained today more than 3 per cent.

During the annual press conference Vladimir Putin said that Russia will have to cope with economic headwind in the next two years. He said that the central bank should not waste the currency reserves on market interventions.

However, in spite of Putin's remarks the rouble slide was not tamed after rates hikes but after central bank and ministry of finance sold the dollar to shore up domestic currency. Although other measures have had influence on the market, they were not crucial, but rather they facilitated the overall impact of Russia actions.

The zloty under pressure

The latest data from Polish economy was rather meager. Reports on wage growth and industrial production missed expectations. The inflation decline was stronger than anticipated. Although the data won't alter the stance of the Monetary Policy Council, coupled with heightened risk aversion the resulted in the weaker zloty.

The zloty posted significant losses against the dollar (lowest since July 2012) and the euro (lowest since February). It even fell against the frank, that was weakened against the euro after the SNB introduced negative interest rates (a broader view in our morning commentary).

The zloty is under pressure due to the Russian currency crisis. Although the slide of zloty hasn't stop in spite of rouble's stabilization, the impact of this factor won't last long and the Polish currency will probably tame losses in the next few days.