Afternoon analysis 28.01.2016

Weak US reports after balanced statement from the Federal Reserve. However, a more dovish stance of the major central bank may support the market sentiment in the longer term. The zloty increased against all its major pairs. The Polish currency remained at the low level.

Wednesday's statement from the Federal Reserve was more dovish than it was expected. The US monetary authorities will closely monitor financial and economic development on the world and asses their implications to the US labor market and inflation rate. The Fed acknowledged that there is some uncertainty in whether the plan of four interest rate hikes in 2016 will be fulfilled.

Today's data on orders for durable goods missed the forecasts. Orders dropped by 5.1 percent and the report that excludes transportation equipment dropped 1.2 percent. Moreover, the reports from previous month was revised down. In contrast, the labor market data exceeded the forecast. The number of unemployment claims dropped to 278k from 282k.

Weak economic data just one day after the Fed said it will closely monitor the economic developments increased negative pressure on the dollar. As a result, the EUR/USD continued the appreciation move that started this week. If coming reports continue to disappoint, the dollar may decline even further.

Zloty may increase

Finance minister Pawel Szalamacha said at the press conference that he is pleased with the outcome of recent debt auction which the government sold 8 billion zlotys of bonds at. He said that improvement in the debt market occurred in the last few days as the deficit data may be better than expected. The finance ministry said on Tuesday that given the 3.6 percent GDP growth (more than the 3.5 percent expected) it is very likely the government deficit will be below 3 percent GDP level.

Today minutes from the January Monetary Policy Council meeting were released. The discussion description showed some divergence among the policymakers. Part of the MPC sees an interest rate hike as justified move that will provide more flexibility in the period of lower economic activity in the future. However, the other part said that an opposite move is justified as the inflation remains subdued and the demand growth is only modest.

The minutes showed that the MPC left interest rates unchanged due to heightened uncertainty concerning the monetary policy determinants. Given the situation, the monetary policy should consider its impact on the financial markets. Some policymakers added that lower interest rates would increase negative pressure on the financial result of the banking sector in the time of rising taxes.

Given the January minutes one can conclude the MPC saw an interest rate cut as a threat to the zloty's stability. Although weak zloty support the inflation rate, Poland depends external financing and it would increase tensions in the financial system. However the outlook for the monetary policy may change as the new MPC will meet February, it is rather unlikely given the latest comments from the recently appointed MPC members.

More flexibility presented by the Federal Reserve and clearly a dovish stance of the European Central Bank may support the market sentiment in the longer term. In this context the probability of a stronger zloty increased. However, the zloty will rather remain near low levels.