Daily analysis 14.06.2013

EUR/USD is holding close to its recent highs. Better data from the U.S didn't support the dollar. The market will force Bernanke to keep QE for longer? Significant improvement of the sentiment toward EM. Inflation data from Poland didn't affect the zloty but bring closer the July interest rate cut.

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

• 14.00 CET: core inflation form Poland (survey: 0.0% m/m and 1.0% y/y)
• 11.00 CET: CPI inflation form the Eurozone (survey: 0.1% m/m and 1.4% y/y)
• 15.15 CET: industrial production from the States in May: survey + 0.2
• 15.55 CET: University of Michigan confidence index (survey: 84.5 points)

The dollar is weaker, but still holds gains despite better then expected data form the States. Does the market forcefully demand more QE?

Yesterday, we had quite interesting day on currencies. In the middle of the European session it looked like EUR/USD was loosing ground a bit and was heading toward a correction. At 14.30 CET the dollar got a bullish portion of data (both the retail sales and unemployment claims were better then estimated). In line with overall mood the dollar strengthen by around 50 pips (form 1.3330 to 1.3280). However, the slide was pretty short-lived and after the S&P 500 started its rising move the EUR/USD recovered all the losses and actually closed close near the recent highs (1.3375). Why did the dollar lost the ground despite the positive eco reports and what does it mean for the following days?

Partially the answer to the mentioned question we can get from Jon Hilsenrath on the “WSJ” web site (http://blogs.wsj.com/economics/2013/06/13/fed-likely-to-push-back-on-market-expectations-of-rate-increase/?mod=WSJ_Markets_LatestHeadlines ). He points out that the Federal Reserve tries to show markets that any monetary tightening is far away (near zero interest rates should stay at least till mid 2015), but investors seem not to listen. They predict that fed funds rate in December will be 0.35% (whereas currently it is at 0.08%). The author also cites Jan Hatzius, chief economist at Goldman Sachs who states that “ The market is saying, The fundamental economic outlook really hasn't changed much, but we are getting more worried about Fed policy”. This is actually the last thing Ben Bernanke wants to see. If the market prices in rate hike it, in fact, tightens the monetary policy (which can be premature concerning the early stage of the recovery). Therefore Ben Bernanke should sound pretty dovish on Wednesday to calm the markets and prevent the overestimated probability of the rate rise (this can answer the question why the dollar is pretty weak, even though the data on Thursday supported the greenback).

Summarizing, my Thursday morning expectations regarding the EUR/USD correction before the Fed meeting seems to be flawed. The positive sentiment (stock market) combined with longer easing expectations should boost the EUR/USD in the coming days.

The zloty is taking advantage of the “risk on” trade.

Thursday, and especially its second part, was bullish for the zloty. It was not due to lower then expected inflation but rather a result of global EM sentiment improvement. More expectations for longer QE (as mentioned in previous paragraphs) also supported the zloty. Now Ben Bernanke will be under pressure to sound move dovish to keep the expectations of low interest rates longer. In consequence the earlier QE tapering is rather finished story (the story which has been played on the market since May 22th).

The inflation data, stronger zloty, and more QE expectations should push the Polish MPC to lower the rates again. It is, however, almost certain that it will be the last cut in the cycle and probably the last interest rate change this year (the MPC will communicate it in July).

Summarizing the Thursday's zloty strength is bringing the EUR/PLN rising trend to the end. If we fall under 4.20 the range trade should dominate again. Only a strong sentiment deterioration will push the EUR/PLN over 4.28.

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.

We are still bullish on the EUR/USD. The USD/PLN continues its sliding trend and EUR/PLN generated the sell signal. CHF/PLN and GBP/PLN is close to generate the sell signals.

Technicznie EUR/USD: the rise above 1.3300 is another bullish signal (will be even stronger if we close the week above that level). In the short-term there is a chance that we will be testing 1.35 and in the medium-term even 1.37.

Technicznie EUR/PLN: the fall under 4.22 ends the rising trend and suggesting to close the long positions. The slide under 4.20 should generate the sell signal with the target around 4.12. Alternatively the rise over 4.28 will be bullish

Technicznie USD/PLN: the pair reached quickly its bearish target – 3.15. The slide under 3.15 should generate more selling pressure and a fall toward 3.08-3.1.

Technicznie CHF/PLN: the franc is also close to generate the sell signal (a fall under 3.40 ends its bullish trend).

Technicznie GBP/PLN: also on the pound we are close to generate the sell signal (under 4.95). Falling under 4.95 generates the first target at 4.90. Rising over 5.02 should be bullish for the pair.