Daily analysis 05.07.2013

Downside pressure on the EUR/USD after the ECB meeting. Draghi said yesterday that “The Governing expects the key ECB interest rates to remain at present or lower levels for en extended period of time”. NFP in focus at 14.30 CET. The zloty took advantage of the ECB statement and gained some ground.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 12.00 CET: Factory orders in Germany (survey: 1.2%)
• 14.30 CET: NFP from the US (survey 165k)
• 14.30 CET: Unemployment rate in the US (survey: 7)

ECB “Forward guidance” lacks of details

Most of market participants didn't anticpate anything new regarding the monetary policy. The interest rates were supposed to remain unchanged, and the ECB chief was expected to sound fairly optimistic on the 2nd half of the year. The truth was, however, quite opposite. The European Central Bank seemed to be concerned with yields rise and future rate expectations, after Ben Bernanke had started signaling QE3 tapering. Mario Draghi changed the long lasting rule (not to precommit monetary action, valid even in the last statement), and gave some forward guidance regarding the rates. He clearly and slowly stated that “interest rates remain at present or lower level for an extended period of time”. Answering a reporter question he also added that the possible cut is also possible on the deposit rate. Overall Draghi sounded rally dovish, but the ECB chief didn't answer key questions. How long the current policy will last, and what can be a trigger to a hypothetical cut (the policy looks similar to the Fed's but without any details like unemployment rate or inflation at certain level; forward guidance is nicely presented at the Fed's website: http://www.federalreserve.gov/faqs/money_19277.htm).

The dovish statement swiftly pushed the euro and government bonds much lower. On the other hand stocks got a strong boost, and ended the day with hefty gains. However, the statement was quite confusing which can be confirmed by comments form market professionals. Bloomberg economist David Powell claims that the “press conference appears to have been mostly a tactic to delay additional interest rate reductions” [giving the impression that ECB is ready to cut, but will not do that]. The other idea was presented by UBS economist Reinhard Cluse. In a note to clients he wrote that “ECB won't hesitate to cut rates again, including the deposit rate, if sentiment and activity data fail to improve”. Today, finally we have the NPF reading. However, after the message from the ECB the volatility does not have to that high. The Payrolls will have to differ quite substantially from estimates (at least 30k) to change/increase the recent moves.

The dovish statement swiftly pushed the euro and government bonds much lower. On the other hand stocks got a strong boost, and ended the day with hefty gains. However, the statement was quite confusing which can be confirmed by comments form market professionals. Bloomberg economist David Powell claims that the “press conference appears to have been mostly a tactic to delay additional interest rate reductions” [giving the impression that ECB is ready to cut, but will not do that]. The other idea was presented by UBS economist Reinhard Cluse. In a note to clients he wrote that “ECB won't hesitate to cut rates again, including the deposit rate, if sentiment and activity data fail to improve”. Today, finally we have the NPF reading. However, after the message from the ECB the volatility does not have to that high. The Payrolls will have to differ quite substantially from estimates (at least 30k) to change/increase the recent moves.

Summarizing the ECB statement will put pressure on the euro in the following weeks. Previously the EUR/USD was reacting rather to the changes in the dollar value then to the euro. Now there is an additional element (new ECB policy) which will increase the volatility, and keep the downward pressure on the common currency.

The zloty gained value after the ECB meeting

Yesterday the zloty strengthened significantly. It was mainly caused by the ECB dovish statement and Wednesday's end of the Polish easing cycle. Now the rate differentiation between the Eurozone and Poland can only widen (ECB can cut, RPP did end the cycle last Wednesday). Therefore on the interest rate difference basis the capital should flow to the Polish zloty (at least theoretically). It should support the PLN and prevent the zloty weakness even in case of more market turbulence.

It is possible that on Thursday the EUR/PLN rising trend was reversed. The fall under 4.28 (technical level) and a fundamental change regarding the ECB policy should give some support the zloty and we can see that the Polish currency remain between 4.22-4.30 for longer (unless a major unexpected event occur on the market).

Expected levels of PLN according to the EUR/USD rate

Expected GBP/PLN levels according to the GBP/PLN rate

Overall technical situation on the analyzed pairs

The EUR/USD slided under 1.2900 which confirmed the market bearishness. The CHF/PLN and EUR/PLN generated the sell signals. The pound is close to generate the sell.

Technicznie EUR/USD: in line with the trend the EUR/USD is sliding toward 1.2800. If the support fails then we can expect the further downward pressure toward 1.2650 (lows form November 2012). Alternative scenario is a rise over 1.3070 with a buy signal.

Technicznie EUR/PLN: the pair fall under 4.28 what generated the sell signal with the target around 4.22. Altern.

Technicznie USD/PLN: the USD/PLN is still in the rising trend. After rising above 3.35 the next target is set around 3.50.

Technicznie CHF/PLN: the sell signal was generated after falling under 3.48. The taraget is now 3.42. Alternatively the rise over 3.52 should be bullsih.

Technicznie GBP/PLN: the 5.10 target has been reached. The next one is around 5.20-5.22. The slide under 4.97 should favor bears.