Daily analysis 25.03.2014

A significant jump on the EUR/USD after the European session ended on Monday. John Williams from the Federal Reserve in response to Yellen words. Ifo readings close to market expectations. The zloty is slightly stronger after solid retail sales and unemployment data.

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

• 15.00 CET: New home sales from the US (survey: 440k).
• 16.00 CET: Conference Board consumer confidence index (survey 78.4 points).

Bulls. Williams. Ifo

The European session on the EUR/USD was pretty calm yesterday. However, just after 18.00 CET hit the clock we could observe a 100 pips jump within the next hour. Such a move is really unusual, especially that the London trading hub finishes the day. The move could not be explained by any macro data. US PMIs were published a few hours earlier and they were not that bad, even though the manager index dropped from the previous month (55.5 vs 57.1; moreover, the US still relies on ISM manufacturing much more than on the PMI). The other “explanation” of the afternoon mystery jump could be John Williams interview for the “Washington Post”, but it actually also was published on its Internet website much earlier. It is possible that the move was initiated only by smart trading. Some “big fishes” exploited two facts. Firstly, the trading around 18.00 CET is pretty thin so the move was fairly easy to initiate. Additionally, they were expecting that after Yellen's hawkish comments there can be a lot of short positions opened in the recent days with fairly close stop losses. The market was squeezed and jumped. This is not the end of the story. Trading on the higher level (when the Asian and European session began we were around 1.3835) makes it also possible for “longs” (who were not expecting Yellen to be that hawkish and had their position open before FOMC meeting) to close the positions at fairly elevated levels (during normal trading). If this is true, we can expect that the EUR/USD can fell significantly in the incoming hours and we may still close the week under 1.3700.

Leaving the short-term trading tricks, it is worth to focus on John Williams interview for the “Washington Post”. San Francisco Fed's president (non-voting this year; dove) said: “I don't expect us to start raising interest rates until the second half of 2015”. He also added that “any interest rates increases we do have in 2015 will be relatively gradual”. However, he also said that “Any kind of standard way of thinking about monetary policy is, with unemployment lower, then down the road interest rates will normalize a little bit faster”. Williams tried to sound more dovish, but he kind of confirmed that market expectations should be brought closer to the mid 2015 than later. “The Wall Street Journal” publishes also that Credit Suisse expects that interest rates in the US will rise in “late” 2015 whereas earlier expectations were anchored in “early” 2016.

Published at 10.00 CET, Ifo index was fairly close to the previous reading (110.7 vs 111.3 in February). German companies sees the current situation more optimistic than a month ago (rise from 114.4 to 115.2), but the subindex for their expectations in the next 6 months fell 106.4 from 108.3 in February. As Hans-Werner Sinn, President of the Ifo Institute pointed out “The crisis of emerging economies and the events in Crimea are impacting the confidence of German firms”.

Summarizing, the markets are still trying to evaluate the impact from the most recent FOMC decisions. Remarks from some Fed's officials sightly softened the Yellen hawkish comment, but the perspective of rising interest rates around mid 2015 seem to be a base case scenario. That fact (with more solid US data) should be the main impulse that can push the EUR/USD lower.

Stronger zloty

We got quite good data from Poland before noon. According to statistical office (GUS), retail sales jumped by 7.0% in February (median expectations collected by Polish Press Agency were at 6.2%). There was also a positive surprise from the job's market. The unemployment rate fell in February to 13.9% from 14.0% in January (usually the unemployment rises during the winter months because the data is not seasonally adjusted) and 14.4% a year earlier. We could even observe a bullish reaction on the zloty which is fairly unusually in recent months (the PLN usually moves on the global news).

The rest of the day should be fairly calm on the PLN. The EUR/PLN will be traded slightly below 4.20 level and the CHF/PLN will not rise above 3.45. In the longer perspective in the macro data does not fall short of expectations (the impact of Russian-West tensions does not put downward pressure on the export) we should expect the local currency to gradually increase its value (faster than currently expected rate increase, positive developments on the current account and increasing chances for more foreign investments).

Expected levels of PLN according to the EUR/USD rate:

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