Afternoon analysis 19.11.2015

The EUR/USD rebounded due to the absence of new market drivers. The zloty remained at a low level. Reports from the economy and a somewhat dovish stance of the MPC did not help the Polish currency.

The minutes from the European Central Bank's meeting in October showed that the monetary authorities consider additional stimulus. The Frankfurt-based institution is worried about the low level of inflation in the eurozone. Currently, the inflation growth is well below the 2 percent target. In addition, the monetary authorities consider the Chinese slowdown and other emerging market problems as a potential threat.

The scenario of additional stimulus was outlined by ECB President Mario Draghi in October during the press conference after the decision regarding the interest rates. Since then, the majority of the ECB members has supported the view presented by Mario Draghi. Recently, Peter Praet has been very active in this field. Today, the ECB Chief Economist reiterated his dovish view on the December meeting (more on the issue in the previous commentary).

Yesterday, the Federal Open Market Committee's minutes were published. The Federal Reserve, similarly to the ECB, presented a view that was coherent with the market expectations. The Fed pointed at December as the possible moment for an interest rate hike.

In addition, the US monetary authorities presented a discussion on the possible set of tools that would be used if the economy slows down after the initial interest rate hikes. This approach simultaneously confirms the December tightening scenario and provides some relief to commentators who consider this term as premature.

The releases from two major central banks were in line with the market's expectations. As a result, investors' reaction was calm. Given the situation, the EUR/USD has continued the rebound that started yesterday. As expected changes in the ECB and the Fed monetary policies have been priced in, currently more significant statements from the major central banks are needed to result in higher volatility.

Low level

In October, data from the Polish economy disappointed. Industrial production slowed down to 2.4 percent from 4.1 percent. A result below the 3.5 percent that was forecast. The report on construction also missed the forecast as it dropped 5.2 percent. In contrast, retail sales accelerated to 0.8 percent from 0.1 percent in the prior month. More than the 0.6 percent that was expected. All in all, the reports will rather not support the zloty.

The minutes from the Monetary Policy Council showed, that the Polish authorities see some risk in the Fed's tightening plan as it may increase market volatility. However, the Chinese slowdown did not affect firms. The MPC considers that inflation is caused by low commodity prices and global factors and the labor market is strong. A few MPC members see the drop in prices as a factor that supports real income of households and limits costs in companies. Given the newest NBP forecast, the MPC expects a steady expansion of the economy.

However, the minutes contained a clearly dovish statement. According to some MPC members, although currently leaving rates unchanged is justified, it may be appropriate to cut the cost of credit in the coming months. It has been a significant change to the previous minutes that were saying about the possibility of hikes in the coming months.

On Thursday the zloty was steady at the low level. Reports from the Polish economy and the dovish minutes from the MPC did not help the zloty. Currently, the chance for a stronger zloty rebound is limited. The dollar and the pound remained near the highest levels in years.