Afternoon analysis 25.02.2015

Janet Yellen's testimony hasn't sparked volatility in the markets. The pound still in a good shape. The zloty exploited favorable environment to gain.

Surprisingly, Janet Yellen's testimony has not resulted in heightened volatility in the markets. The EUR/USD was briefly affected just after chair's statement was published, but later it stabilized in narrow band 1.1340-1.14.

The Federal Reserve president is preparing investors for irrevocable interest rates increase this year. Yellen said that removing “patience” from Fed's statement would mean an interest rates hike as soon as at third future meeting. Nevertheless, Yellen said that Fed decisions are based on its assessment of economic conditions and not on any calendar (more about Fed in previous commentaries).

Investors' attention shifts to economic reports. If next data from the US points at deterioration of expansion, the outlook for interest rates hikes moment will defer. As a reminder, recent reports from the US have been generally below expectations. Next important figures are inflation rate (tomorrow) and consumer and companies sentiment indexes on Friday.

A somewhat important report is Friday's revised GDP report. Last reading missed expectations, but the growth data are often revised significantly. Any result that differs from initial reading may result in heightened volatility in the dollar market.

Today's report from the US housing market was above expectations. New home sales stood at 481k – more than expected. Yesterday's report on home prices was also positive – prices measured by S&P / Case-Shiller index gained more than anticipated. Recent report show that the momentum in the US housing market is still solid. This is another argument for the Fed to pursue its plan to rise rates, but the release didn't affect the EUR/USD.

Strong pound

Bank of England president Mark Carney said during hearing by the parliamentary commission that current low inflation in the UK is not negatively affecting the economy as it is caused by drop in oil and energy prices and low food prices.

Moreover, the expansion in the labor market is still solid. The unemployment rate dropped to pre-crisis level and wages are rising. As a result, the BOE expects the price growth to pick up in early 2016. A similar view has been presented by few other members of the Monetary Policy Committee.

The pound exploited weak performance of the euro and the dollar. The British currency is at its highest level since January against the dollar and at highest level since the end of 2007 against the euro. The British currency is in a position to extend recent gains as the Fed is not in hurry to rise rates and the euro remain weak ahead of QE.

Limited risk

Greece reached an agreement with country's creditors what finished speculations about possible euro zone dismantle. Although a similar problem is likely to return in next couple months when current agreement expires, the scenario will be rather the same as recent. This factor was visible in the Greek financial market, and its presence in the broad market was limited. Moreover, the Ukrainian crisis impact is limited in spite of news that truce is violated.

Current market environment is favorable for the zloty appreciation. The Polish currency posted gains against all major currencies except the pound and frank. If sentiment in the broad market improves, the Polish currency may extend gains. The EUR/PLN may drop to 4.10 zloty and the EUR/USD to 3.60.