Afternoon analysis 20.11.2015

The euro returned to declines as ECB president Mario Draghi sees more stimulus in December. The zloty increased on dovish comments from the ECB. However, the move was rather a short term correction.

Mario Draghi in today's speech clearly confirmed the dovish stance of the European Central Bank. The Frankfurt-based institution president reiterated that in December the monetary authorities will re-examine the policy tools that have been used to tackle low inflation. If the assessment shows that the probability of inflation rebound to the target (near 2 percent) is rather low, the central bank will use all measures within its mandate to spur the price growth.

The ECB president cited the possibility of asset purchase program expansion and cutting the deposit rate.

In contrast, Bundesbank President Jens Weidmann presented a more restrictive view. The German central bank chief said that currently there is no reason to present such a gloomy picture of the economy. Moreover, Weidmann added that the case for December stimulus expansion is premature as the measures used earlier did not have enough time to support the economy.

However, Mario Draghi's confidence presented during his speech reveals that he has built very a strong coalition to pursue the loosening in December. For this reason, he can ignore the doubts of the Bundesbank, one of the major eurozone central banks.

The market reaction was unambiguous. The euro declined against the dollar and other major currencies. Nevertheless, the overall extent of decline was smaller than the one on 22 October, when Mario Draghi signaled more stimulus in December for the first time.

In the second part of Friday's session the EUR/USD was stabilizing little below the 1.07 level. The monetary policy shifts in the eurozone and in the US have been mainly priced in. As a result, the market volatility was limited in spite of quite decisive remarks from central bankers.

Zloty little higher

The latest reports from the Polish economy were neutral. The weak reading of industrial production was compensated by the improvement in retail sales. In contrast, the labor market remains strong, thus the wage growth will continue. This factor will support consumption in the medium term and increase the chance for an inflation rebound. Given the situation, it was surprising that the MPC's minutes cited the possibility of interest rate cuts in the coming months. This factor will not support the zloty.

On Friday the Polish currency posted some gains. The zloty was stable against the dollar. And it increased against the euro, the franc and the pound. The zloty posted the largest gains against the euro as the common currency was hit by the comments from Mario Draghi.

Nevertheless, the dovish stance of the European Central Bank was clearly not significantly reflected by the zloty's performance. The Federal Reserve's plan to tighten the monetary policy is more important for the zloty. Given the situation, the chance for the zloty's rebound is currently rather limited.