Afternoon analysis 24.02.2015

Greece's proposals on economic measures have been accepted by the European Commission. The pound moved up after hawkish comments from the Bank of England. The zloty increased due to the sentiment improvement.

The European Commission has accepted Greece's proposals on economic measures to be implemented in exchange for financing from bailout program. This ends one-month uncertainty period during which investors speculated that the country may leave the euro zone after a default of the government.

The Syriza government will receive sources enough to normally operate within next four months. In exchange, the nation will pursue reforms in pension system and tackle tax evasion. Privatization program will be also continued.

Greece faces next challenge – a deal with the EU that will ensure financing after the agreement that has been just sealed expires in mid 2015. One can expect that situation in June will be similar to that observed recently.

Nevertheless, the final agreement on Greece didn't affect the EUR/USD. The key event on Tuesday was Janet Yellen testimony in Congress, that gave some insight in the Federal Reserve's plan to tighten its stance in mid 2015.

Today's reports from the US housing market reassured investors that expansion is strong. The S&P / Case-Shiller index gained 4.5 percent on a yearly basis – more than anticipated. The report coupled with labor market data provide additional arguments for the Federal Reserve to rise rates in mid 2015.

Janet Yellen's remarks on monetary policy briefly increased volatility in the markets, but later the situation calmed. The overall view on the Fed's policy was not altered, as the Fed chair tried to balance her testimony.

BOE calm on inflation

The pound remained in quite good shape. The British currency hit seven years high against the euro and was at its highest since the beginning of January against the dollar.

The Bank of England president Mark Carney sees low inflation as a result of one-off events – five year low in oil price, low energy prices and food prices. Moreover, the BOE expects that the price growth continue to move near zero and may even drop to negative level.

Still, the inflation should start to increase in the beginning of 2016, when influence from low energy and food prices fades. Moreover, strong expansion in the labor market (illustrated by low unemployment level and solid wage growth) will push prices up. Martin Weale from the Monetary Policy Committee said, that the rates may be lifted up earlier that market anticipates. This view was presented earlier by Kristin Forbes for the BOE.

To sum up, the BOE sees no danger in current low inflation environment and expects price growth to increase in the beginning of 2016 due to labor market expansion. As a result, the expectations for interest rates hikes in the UK shift to earlier moment than previously expected. That puts the pound in position to exceed gains, especially against the euro.

Zloty strengthened

Recent comments from the Monetary Policy Council members point at 25 basis points cut in March. A similar move was expected given the latest reports from the Polish economy. The CSO said that unemployment rate stood at 12 percent – less than government forecast. The situation in the Polish labor market is improving.

Some risk appetite in the markets resulted in a stronger zloty as Greece reached agreement with country's creditors and the Ukrainian crisis remained marginalized. The Polish currency may rise further if the situation remains positive.