Afternoon analysis 20.05.2016

The euro gained after a poor week. The newest poll before the UK referendum hit the pound. The zloty gained in the second part of the day.

This week, there was a significant revamping of market expectations regarding the interest rates in the US. On Monday, the probability of the interest rate hike in June stood at 4 percent (according to Bloomberg data). Today it was 30 percent. In the case of July’s meeting, it increased to 51 percent from 19 percent.

The situation was caused by the FOMC's minutes, which pointed at June as a possible time for the next hike. The Fed's decision will be based on the economic reports. The latest data supported the tightening scenario by suggesting that the second quarter will be better than the initial three months of this year.

Comments from the important members of the Fed also supported a similar scenario. Before the FOMC minutes were released, a few Fed officials had said that the market should expect at least two hikes this year. On Thursday, New York Fed President William Dudley suggested a meeting in June or July as an appropriate time to consider a hike.

Although the dollar dropped on Friday, given the latest changes in the market expectation, the probability of a stronger dollar has increased.

The pound dropped after quite a good week. To some extent, the move could have been sparked by profit taking. The second factor could have been the latest TNS poll that suggested an increase of Brexit supporters. The survey showed that 41 percent would vote for Brexit, 38 percent of responders were against and 21 percent were undecided.

The zloty little higher

Eugeniusz Gatnar from the Monetary Policy Council commented on the latest reports from the Polish economy (source: Polish Press Agency). He said that the report on industrial production in April showed that the March slowdown was only transitory. Gatnar said that the economic expansion in on track and the interest rates are at the appropriate level.

Eugeniusz Gatnar also said that the economy may expand at a 4 percent pace this year. He does not expect the economy to be negatively affected by political disputes. In contrast, government spending will support the expansion.

The zloty gained in the second part of the day. Improvement in the latest data diminishes the expectations of lowering interest rates. In addition, a stronger expansion removes some risk concerning fiscal sustainability. This factor may be important in the context of warnings from the rating agencies. However, the probability of a stronger zloty is rather limited.