Afternoon analysis 20.07.2017

The European Central Bank didn’t surprise, although it caused significant fluctuations in the euro. Today, the zloty is likely to benefit from the ECB's statement and press conference.

Large fluctuations, but the situation has not changed

As expected, the European Central Bank (ECB) has left both the interest rates and the asset purchase program unchanged. The ECB's accompanying statement was retained in the same wording. Recently, speculation has surfaced about a possible QE tapering, so some market participants may have expected the removal of part of the statement about the increase or prolongation of the asset purchases.

The fact of leaving this part has clearly failed some of the investors expectations - the euro has lost value, just after the publication of the message. The EUR/USD pair fell below 1.15, setting a new day's lows and reaching the lowest price in two days. However, during the press conference the EUR/USD has elevated to approx. 1.156, after Mario Draghi (the ECB's president) stressed the expectations of robust economic growth in the eurozone in subsequent periods.

It has been probably too little to sustain the euro. Draghi said that continuation of the current monetary policy is necessary to achieve a sustained adjustment in the path of inflation. In addition, the main inflation rate has been likely to remain at similar to the current level (about 1.3% YOY), and the core inflation (excluding food and energy prices) has remained subdued and expected by the ECB to increase only in the medium term.

Draghi also added that the ECB would not want to jeopardise the rise in prices due to economic growth and rising wages through the tightening monetary policy. Hence, after the turmoil in the market, the euro may return to pre-ECB statement's levels or even weaken somewhat.

The zloty slightly stronger

Today's ECB's statement and press conference may prove positive for the zloty. The conditions have once again become favourable for the Polish currency: the ECB's continuation of an accommodative monetary policy has strengthened the European stock markets but has not strengthened the dollar (where the probability of interest rate hikes has also weakened).

The zloty has clearly gained against the dollar, the franc or the pound - the exchange rate for these currencies was close to recent lows (around 3 p.m. today). The EUR/PLN exchange rate was more stable and around 4.21. The relation of the euro- zloty relation has been characterised by lower volatility than the aforementioned currencies to the zloty. Therefore, should the euro lose value, the EUR/PLN pair will probably return to around 4.20.

Tomorrow's preview

Tomorrow's calendar of events is relatively limited. Investors will probably be pricing in yesterday's ECB statement and press conference. At 7.00 p.m. Baker Hughes will publish the number of active rig count in the US in the concluded week. Last week’s data showed it reached the highest level (765) since April 2015. The price of Brent crude rose just today to about 50 dollars for a barrel, when yesterday’s EIA report showed a draw in crude oil, distillates and gasoline stocks relative to the last week.

However, the production has continued to show an upward trend (an increase of 32k barrels a day compared to last week) and the demand for gasoline has declined despite the peak of the season - which should theoretically grow significantly.

Another increase in the number of active rigs count could hamper the appreciation of oil prices, as it would mean that the American producers will continue to increase the production, resulting in higher oil supply. In the context of the latest OPEC monthly report, which showed a rise production in June and a fall in compliance with production cuts, this could create additional pressure on oil prices.

Two hours later, the CFTC will publish data about the number of crude oil net speculative positions held by hedge funds, among others. Significant increases in long positions and a fall in short ones could further support oil prices. However, despite recent increases in oil prices, the conditions are not quite conducive to maintaining such an upward trend. The US shale production has been on the rise and OPEC has also been struggling with rising production in countries that have been excluded from the production cuts agreement, such as Libya and Nigeria, which generates the pressure on oil prices to make it faster.

The relatively low oil prices have weakened the currencies of countries whose oil exports account for a large part of their revenues and also reduced the global inflationary pressure (which we have observed in recent months).