Afternoon analysis 24.05.2016

The dollar gained against the euro and other currencies. The markets were optimistic in spite of rising probability the Fed will raise the interest rates. The zloty gained in the second part of the session.

On Tuesday the market’s sentiment improved. The European stocks posted significant gains. The major markets increased by at least one percent. Also, the US futures posted gains. Moreover, the commodity markets were up.

The positive sentiment was not limited by the comments from the Federal Reserve, which resulted in a higher probability of the interest rates. Currently, the futures market suggest the probability of hikes in June at 30 percent. In the case of July meeting it was 58 percent and 66 percent in September.

This factor suggests that the dollar may gain further. The EUR/USD dropped today below 1.1160. It was the lowest level since the end of March. A change in expectations for the rates tightening plan in the US suggest a stronger dollar in the longer term.

The fact that the Federal Reserve is going to tighten the monetary policy may be positively assessed by investors. As a result, the anxiety that negatively affected the markets in the beginning of the year, is currently not actual.

Another factor responsible for the sentiment improvement are the latest news on the referendum in the UK. The newest polls suggest drop in support for the Brexit (more on the issue in the previous commentary). This factor positively influenced the British pound and the European assets. However, the volatility will remain heightened.

Zloty little higher

Lukasz Hardt from the Monetary Policy Council said the interest rates will rather remain unchanged (source: ISBnews). He said that deflation does not negatively affect the economy.

Hardt predicts that the economy will accelerate in the coming quarters after poor results in the initial three months of 2016. The major factors to support the growth are consumption and investments.

In the second part of the day the zloty gained against major currencies. The move was caused by the broad sentiment improvement in the financial markets. The factors responsible for the low level of the zloty - the Fed's tightening plan and heightened political risk - still remain. As a result, the probability of a stronger zloty remains limited.