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Afternoon analysis 22.10.2015

22 Oct 2015 17:31|Artur Wiszniewski

Mario Draghi's press conference hit the euro. The European Central Bank may introduce increased monetary stimulation as soon as December. The zloty extended its recent decline against major pairs. The Polish currency managed to gain only against the euro.

As expected, the European Central Bank left interest rates unchanged. The major interest rate was left at 0.05 percent - the lowest level in history. However, more emotions were sparked by the press conference of Mario Draghi. The ECB President portrayed the scenario for more easing this year.

Mario Draghi said that the central bank will re-examine its bond buying program at the December meeting, when new forecasts will be available. Based on this, the ECB will make a decision about whether more stimulation is needed. Moreover, Draghi said that the possibility of interest rates cut was discussed and there was a proposal to extend the QE program.

The ECB press conference was extremely dovish. Although earlier there has been speculations that the ECB may introduce more stimulation before the end of the year, Draghi's press conference was a huge surprise. The EUR/USD dropped below the 1.1160 level from above 1.13 before the conference.

Draghi said that the euro exchange rate has increased recently and is hurting the economy. However, the exchange rate level is not in the scope of the ECB targets. Draghi said that the Chinese crisis is not an important problem for the eurozone.

The dovish ECB conference was combined with solid data from the US labor market. The number of unemployment claims increased to 259k - a reading below the forecast. The report confirmed that the US labor market is strong. As a result, the probability of interest rate hikes increased and the dollar gained. This factor pushed additional pressure onto the EUR/USD.

Pound gave away earlier gains

Today's report from the UK was very positive. Retail sales increased 1.9 percent on a monthly basis. The result was above the plus 0.4 percent that was forecast. It was the strongest gain in two years. On a yearly basis, sales increased 6.5 percent against the plus 3.5 percent in the prior month.

Consumption was supported by the growth of food sales during the rugby world cup. In the whole third quarter sales increased 0.9 percent against the plus 0.8 percent in the prior three month period. As a result, the chance for stronger GDP growth increased.

Stronger consumption supports the case for interest rate hikes as inflation may rebound earlier. As a result, just after its release the pound gained. The British currency gave away its earlier gains against the dollar after the US labor market data was published.

Broad weakness of the zloty

Minutes from the latest Monetary Policy Council in October showed that the MPC is expecting the GDP growth to follow the NBP's projection. However, the inflation rate may miss the forecast. The majority of MPC members agreed that the best solution is to leave rates unchanged. A similar solution supports growth and inflation. Some policymakers said there is need to start normalizing the policy. The minutes did not affect the zloty.

The Polish currency extended this week's decline. The zloty is under the pressure of heightened political risk. Moreover, the coming tightening in the US is hurting risk currencies. The zloty did not exploit the impact of the dovish ECB stance. Currently, there is little chance for a stronger zloty.

22 Oct 2015 17:31|Artur Wiszniewski

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

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