Afternoon analysis 21.01.2016

The ECB ready for additional actions. The euro dropped against the dollar. The zloty increased against the European currency, but hit new lows against the dollar.

In January, the European Central Bank did not change the monetary policy. The base rate remained at the level of 0.05 percent and the deposit rate was left at minus 0.30 percent. The Frankfurt based institution will continue to buy 60 billion euros in assets on a monthly basis.

During the press conference ECB President Mario Draghi paved the way for additional stimulus in the eurozone. Before the meeting there were some rumors that the ECB will not act now, but it might announce new measures in March. The scenario has been confirmed.

Mario Draghi said that there is no constraint in the scope of measures possible to use that are within the ECB's mandate. The ECB Chief said the central bank stance will be review at the next meeting.

Record low oil price will force the ECB to adjust the inflation forecast. Currently it is not very likely that the consumer prices level would rebound. Although there was some improvement in the labor market situation, it is not enough to believe that consumption growth will support the inflation growth. Given the situation, the probability that the ECB will add to stimulus in March is quite high.

The market reaction was different from the one inDecember. In the previous month the ECB disappointed investors and spurred the volatility in the markets. It was caused by the fact that the central bank members sparked expectations for more decisive actions. Eventually, the ECB cut deposit rate and widened the eligibility of asset classes to include in the bond buying program. Although it was an increase of stimulus, the ECB did not change the most important parameter - the monthly value of asset purchases.

Stance presented today by the ECB supported the market sentiment. The EUR/USD dropped below 1.08 to the lowest level since the beginning of January. The stock market sentiment also improved.

Zloty under pressure

Today's data confirmed the solid performance of the economy. After solid data from the labor market today the reports on industrial production and retail sales exceeded the forecasts.

Production increased by 6.7 percent on a yearly basis. The result was better than the 5.6 percent forecast. Manufacturing increased 9 percent. Production increased in 27 among 34 sectors. Production in construction dropped 0.3 percent.

Retail sales also exceeded the forecast. It increased 4 percent after rising 3.3 percent in the prior month. The forecast was for a 3.5 percent increase. The report showed, that strong consumption will add to the growth. This factor may support the GDP result in fourth quarter.

In spite of solid report the zloty remained under pressure. At the beginning of Thursday's session the zloty dropped severely against the euro. The euro exceeded 4.51 zlotys. It was the highest level since 2012. Later the EUR/PLN dropped after Mario Draghi's press conference. However, the dollar increased above 4.14 zlotys. It was the highest level since 2002.

The probability of a stronger zloty in the short term is very low. However, in the longer term the Polish currency may be supported by the ECB additional stimulus.