Afternoon analysis 23.05.2016

Dollar resumed gains. Hawkish comments from the Federal Reserve supported the US currency. The zloty remained under pressure.

On Monday, risk aversion prevailed in the markets. The negative sentiment was reflected by losses in the major European stock markets. The UK market dropped 0.3 percent, the German market declined 0.9 percent and the Italian more than 2 percent. In addition, the US futures declined.

Today's data on the PMI indexes from the eurozone countries showed that the economy may slow down in the coming months (more on the issue in the previous commentary). It was somewhat disappointing as the GDP numbers in the first quarter and the labor market reports all suggested that the economy may accelerate. All in all, the data was not significant for the European Central Bank, thus the euro was unaffected.

Today, some positive information regarding Greece was released. The eurozone countries will approve the disbursement of 11 billion euros if the reform review is accepted (according to Bloomberg). During the weekend, the Greek parliament voted for additional austerity measures to pave the way for additional support. However, this factor did not support the euro.

Stronger dollar

Last week, there was a significant move in the market expectations for interest rates in the US. Currently, the probability that the Fed will raise interest rates in the summer is relatively high. The probability that was estimated on the basis of the futures market was 28 percent for a June hike. It was as high as 54 percent in the case of July’s Fed meeting.

The tightening scenario has been confirmed by today's comments from important Fed officials. San Francisco Fed President John Williams said that one can expect two or three hikes this year (source: Reuters). And St. Louis Fed President James Bullard added that the situation in the labor market is strong enough to expect an inflation rebound (source: Reuters). The comment increased the probability of hikes in the summer.

The factor that may negatively affect the broad market was the uncertainty around the EU referendum in the UK. However, the latest polls suggested that opponents of Brexit gained wider lead (more in the previous commentary).

Weak zloty

On Monday, the zloty exceeded losses. The Polish currency declined against all its major pairs. The EUR/PLN increased to close to 4.45 zlotys, which is the highest level since the end of January. The dollar increased near 3.97 zlotys - the highest level since March.

The outlook for the Fed raising rates has increased the pressure on the emerging market currencies. In the case of the zloty, the additional negative factors are domestic issues. Given the situation, the probability of a stronger zloty is limited.