Afternoon analysis 27.04.2017

Volatility has increased after Mario Draghi’s press conference and worse than expected US data. Zloty slightly higher after ECB conference and US data.

ECB leaves the monetary policy unchanged

The European Central Bank said today in a statement that it left both the interest rates and the monthly rate of net asset purchases unchanged, which was in line with expectations. One can still find the phrase “or lower levels” in the fragment “the Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.”

There has been some speculation recently that the aforementioned phrase could be dropped. Leaving it, ECB suggests continuing a dovish approach despite a more favourable political situation. The reaction on the euro directly after the publication was fairly negative – the EUR/USD dropped from 1.09 to 1.0880. It would suggest that some market participants expected the phrase “or lower levels” to be removed from the statement.

Worse than expected data came at 2:30 p.m. CET regarding the US economy. Initial jobless claims rose by 14k to 257k (vs. expectations of 245k), the highest level in a month. Durable goods orders in March came in below expectations as well – a monthly increase of 0.7% fell short of 1.2% consensus.

After weaker than expected US data and Mario Draghi’s press conference, in which he suggested that risk to the downside are diminishing and moving towards being more balanced, the EUR/USD rose to the level 1.0930 and then dropped to ca. 1.0890. This move was probably caused by Draghi’s comments regarding inflation – he stated that the ECB isn’t entirely sure whether inflation returned to a sustainable growth path.

Zloty close to yesterday’s levels

The Polish currency traded relatively calmly up until 2 p.m. CET. Its value in relation to other major currencies was similar to yesterday’s close levels with pound being the exception. The British currency was stronger today and it appreciated since the beginning of the Asian session.

The pound’s appreciation was supported by the results of the CBI survey. It showed that 59% of retailers said that they volumes were up in April on a year ago, while only 21% said they were down. That gave a balance of +38% exceeding by far expectations of +16 and reaching the highest level since September 2015. After 2 p.m., Draghi’s press conference and worse than expected US data, the euro gained in value while the dollar seemed slightly weaker. That, in turn, caused the zloty to gain slightly in value, although the trading range was relatively narrow.

The sentiment towards currencies in the region remains positive – until that changes, zloty will probably continue to be relatively strong. The results of the first round of French elections also helped the Polish currency as they lowered the overall risk aversion. One need to remember though, that the last months have shown that zloty has been rather sensitive towards changing market sentiment. This risk seems to be limited for now. However, zloty’s potential towards losing value appears to be greater than its probability to appreciate.

Tomorrow’s events

At 10.30, the British Office for National Statistics will publish the initial data regarding the GDP growth for the first quarter. The GDP growth for the fourth quarter of 2016 was slightly disappointing and reached the level of 1.9% YOY. Currently, the market consensus is at the level of 2.2% YOY. Due to Brexit and the recent announcement of early election, the pound has been more sensitive to macroeconomic data. Therefore, if the GDP reading is inconsistent with the consensus, fluctuations on the pound may increase.

At 11.00, Eurostat will present the initial data regarding the eurozone’s CPI for April. In the previous month, the CPI went down from 2% to 1.5%. Moreover, baseline index went down from 0.9% to 0.7%. Currently, the market expects an increase to 1.8% and 1% for the main and baseline indexes, respectively. Investors will most likely focus more on baseline index. This is because its growth would increase chances for a sooner monetary tightening in the eurozone. However, the ECB has indicated that this would require baseline inflation to increase constantly. Therefore, the euro’s reaction will most likely be limited, even if the data is positive.

At 14.30, the Bureau of Economic Analyses (BEA) will publish the initial data regarding the American GDP growth for the first quarter. Despite that this index increased 2.1% YOY in the fourth quarter of 2016, the market expects the GDP growth to be at the level of approximately 1% YOY. Moreover, the GDPNow is indicating that this index will be at the 0.5% level. Investors may interpret similar results negatively, especially taking into consideration yesterday’s plan regarding fiscal changes, which assumes that a 3% annual economic growth is required to balance the budget. The BEA publication may increase the dollar’s volatility. According to the GDPNow, a positive reading seems unlikely. Therefore, the potential for the USD depreciation is large.