Afternoon analysis 19.02.2016

The dollar gained in the inflation report. Finance minister Paweł Szałamacha pleased with a weak zloty. The Polish currency gained against all its major pairs.

After a few days of gains on Friday, there was some risk aversion. However, the scale of correction is quite limited. The German DAX dropped 0.5 percent, and the US futures declined 0.4 percent.

It could have been due to the negotiation process between the European Union and the UK. No one expects a breakthrough today. Thus, the negotiation will weight on the markets in the longer term and the impact will rise as the referendum term draws near.

The sentiment deterioration is caused due to the rising probability of interest rate hikes in the US. Yesterday's report on new unemployment claims was better than expected. However, currently the Federal Reserve is more susceptible to the reports concerning inflation. As a result, the dollar's reaction was limited.

Today, the inflation report was released. It was clearly above the forecast. In January, the consumer price rates increased to 1.4 percent from 0.7 percent in the prior month. The market consensus was for the 1.3 percent level. Core inflation data was also above the forecast. The gauge which excludes volatile food and energy costs, increased to 2.2 percent from 2.1 percent in the prior month. The forecast was for 2.1 percent.

San Francisco Fed President John Williams’ stance was quite hawkish. He said he is pleased with US economic developments and the situation in the labor market. Williams said that low inflation is stemming from low commodity prices and a strong dollar. However, the price growth will return to the Fed's target of 2% within two years.

Williams’ statement and the inflation figures, are factors responsible for the increase of the probability of interest rate hikes. Currently, the futures market shows little chance for hikes in 2016. The probability is clearly higher at the end of the year, but is less than 50 percent. Nevertheless, recent days have shown that the discussion on whether the Fed will raise rates will be very interesting.

As a result, the dollar gained in the second part of the day. The EUR/USD dropped below 1.1070 against today's high at 1.1130.

Stronger zloty

Today, Finance minister Paweł Szałamacha was interviewed by the Bloomberg agency. Asked to assess the impact of the rating cut by the Standard & Poor's agency, he said that this factor currently has no impact in the Polish financial markets. Recently, the zloty and bonds are stable, and the demand during debt auctions is strong. Paweł Szałamacha is pleased with the low level of the zloty, as it supports the export.

Another issue discussed, was the anxiety concerning the independence of the National Bank of Poland. Paweł Szałamacha said that in mid-2016, a new president will be chosen. It will be in line with the current legal framework, and there is no plan for institutional changes. Szałamacha refrained from citing any possible NBP president.

The statement from Szałamacha has shown a large tolerance for zloty depreciation. It may weigh negatively on the zloty when the risk aversion is heightened. Nevertheless, the zloty increased recently. Today, the Polish currency gained against all its major pairs. If the market sentiment remains positive, the zloty may gain further. But, the Polish currency, rather, will remain at the low level.