Daily analysis 17.02.2015

Greece failed to reach an agreement with its creditors. The euro exploited solid reports from Germany to increase. The pound gained in spite of record low inflation numbers.

The talks between Greece and euro zone countries were canceled very fast. However, the market reaction was rather calm – the euro dropped just after information was released, but later the common currency recouped losses. The US markets were closed on Monday.

The European Union gave Greece an ultimatum – the country has to accept the extension of current bailout as a basis for any further negotiations. The Greek government is not eager to accept a similar solution.

The finance minister Yanis Varoufakis refused to agree with its counterparts that the extension of bailout is only option, but he didn't provide details on his proposition. The politician said also, that he was going to accept a proposal sketched out by the EU commissioner Pierre Moscovici, but the draft was changed by Jeroen Dijsselbloem, who chairs the Eurogroup.

The deadline was set on Friday – the last possible day that would allow EU governments to accept extension of bailout. No agreement would lead to Athens run out of money by the end of March.

Although the deal still has not been agreed, the most probable scenario is a some sort of compromise, that would require concessions from both sides. The alternative negative scenario that would lead to euro zone dismantle is less likely to occur. Moreover, the Greek turmoil is a local factor – the Greek financial market was pressured, but the broad market was rather calm.

Moreover, the euro posted gains as the German reports exceeded expectations. The ZEW index – a measure of economic expectations in the major euro zone economy – moved higher. Recent reports coming from Germany show that the expansion is gaining momentum. Earlier, the GDP data also exceeded projections.

Pound in good shape

The inflation growth in the United Kingdom hit a record low. In January the price growth stood at 0.3 percent – the lowest level since 1989, when the data started to be recorded. Moreover, the other analyzes from the statistical office showed that the price growth has the lowest pace since 1960s.

A low inflation environment was caused by supply factors – very low oil and food prices. Moreover, the competition between supermarkets in the UK pushes prices down. The Bank of England said that the inflation rate may drop below zero in the near term, but it will return to central bank's goal within two years.

Low prices result in increased purchasing power of households. The labor market is very strong with unemployment rates at pre-crisis level and growing wages. These factors improve economy assessment and lower likelihood for interest rates cut as inflation deteriorates. The BOE said that low inflation in UK is different from euro zone or Japan and does not pose a threat for the economy.

The pound lifted up against the dollar in spite of inflation readings. The British currency dropped against the euro and move away from the highest level since 2008.

The zloty increased against the dollar

The weakness of the dollar let the zloty to gain against the US currency. The Polish currency was little changed against other major currencies as it is waiting for today's reports from labor market. The data may affect expectations for interest rates cut, if release misses forecast. The Polish currency should remain stable, as there is no new negative information from Greece and Ukraine.