Afternoon analysis 19.02.2015

Markets swing as Germany rebuffs Greek proposal. The NBP president Marek Belka helped the zloty only for a moment.

As expected, Greece requested six-months extension of credit agreement. However, there are no details on this proposal. Moreover, information agencies are not precise in describing the proposal by not making it clear whether Athens asked for extension of loan agreement or bailout agreement.

Nevertheless, Reuters said that the country asked for a loan and also offered major concessions to meet Eurogroup expectations in the field of austerity policies. A similar solution would have met goals of both sides – the Syriza government would have got sources for normal government operations without sticking to bailout program. The EU would have been ensured that the country will pursue reforms, but not in the program named “bailout” but “loan agreement”.

Late the German finance ministry said, that the proposal is not acceptable. As a result, the market sentiment has deteriorated and investors were forced to wait until tomorrow's meeting of the Eurogroup.

Minutes from the Federal Reserve last meeting were rather dovish, what is hurting the dollar and add to short-term correction of the US currency. However, the reading on unemployment claims was better than forecast, what should have supported the US currency. The EUR/USD hovered above 1.14 as the Greek uncertainty and mixed data from US clouded investors' judgment.

The pound in good shape

The Bank of England sees inflation increase in the beginning of 2016. The British monetary authorities pointed at labor market, as a source of prices growth. The increase in wages and the unemployment rate in pre-crisis level coupled with record low inflation result in heightened purchasing power of households. As a result, a rebound in consumption will help to lift up inflation growth from current low level.

As a result, the expectation for rates increases in the UK shifted to an earlier moment. This is the major source of the pound strength in recent days.

Frank below 3.90 zloty

The minutes from the Monetary Policy Council in February showed that monetary authorities are quite optimistic in assessing the outlook for the economy, however, the euro zone is still considered as a threat for sustainable growth. The MPC considers current low inflation environment as a situation that is not hurting the expansion as it caused by supply factors. Some MPC members see weak demand as a source of low inflation.

Some MPC members see the need for interest rates cut, whereas others are willing to wait until the NBP reveals its projections. To sum up, the MPC minutes didn't affect the zloty as the expectations for a 25 basis point cut in March was not altered. The zloty was briefly strengthened by the National Bank of Poland president Marek Belka, who said that the Polish currency is undervalued.

The Polish currency managed to keep earlier gains in spite of Greek turmoil. The frank stayed below 3.90 zloty, and the euro and the dollar dropped. However, a more significant appreciation of the Polish currency will be possible if the Greek situation is resolved.