Afternoon analysis 27.05.2016

The investors are waiting for Janet Yellen’s speech. The dollar resumed gains after two losing sessions. The zloty gained against all its major pairs.

Revised data of the US GDP was better than expected. The reading showed that the economy expanded at the 0.8 percent pace (annualized) - up from 0.5 percent reported earlier. Although the economy's results in the first three months of the year are still rather poor, an improvement has increased the probability of the monetary policy tightening.

Currently, the market consensus is for an increase within the next two meeting of the Federal Reserve. In this context, today's speech from Janet Yellen may give some insight. Earlier comments from major Fed officials have been rather hawkish. If Yellen supports the case for higher rates, the dollar may gain further. Today, the US currency gained after the release of the GDP numbers.

The zloty recouped losses

Minutes from the May MPC meeting showed that the monetary authorities expect deflation to hold in the coming quarters. The major factor responsible for the situation is low energy prices. In the longer term this factor will recede as the inflation gets support from stable GDP growth and a strong labor market. The MPC expects the Polish economy to accelerate, but the pace of growth may be limited due to soft growth in other countries.

Some MPC members cited few risk factors to the inflation rate. The limited wage growth, in spite of a low unemployment rate, may limit the inflation rebound. In addition, a possible slowdown in the economy may negatively affect the price growth.

The MPC sees no adverse impact of the deflation on the economy. It was a confirmation of the stance that has been presented by the MPC. As a result, the probability that the MPC will lower rates due to deflation is rather low. Still, the MPC said that taking into account high capacity utilization, the rate of investment is rather low, as well. The situation may suggest, that companies are discouraged to invest due to risk of low returns.

The minutes suggested that the MPC may consider lower rates in the situation of slower GDP growth. The latest reports have suggested that the economic slowdown was transitory. Especially because the industrial production reports surprised positively.

The zloty gained in the last few days. But the Polish currency remained at the low level. The outlook for higher interest rates in the US and heightened political risk in Poland limit the probability of a stronger zloty.