Daily analysis 30.04.2015

The US GDP reading turned out to be more important than the FOMC statement. The Federal Reserve significantly reduces the odds for interest rate hikes before September. The zloty is weaker against the euro after the sell-off in the fixed income market.

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

• 14.30 CET: Jobless claims from the US (survey: 290k).
• 14.30 CET: Core PCE inflation (survey: +1.4% y/y).
• 15.45 CET: Chicago PMI from the US (survey: 50 points).
• Friday at 16.00 CET: Manufacturing ISM from the US (survey: 52 points).

The GDP and fear moved the market before Fed's statement

Investors' expectations about the Federal Reserve being the key element for the market turned out to be flawed. A significantly worse than expected GDP reading (+0.2% vs expectations around +1.0%) spurred fear around long dollar position holders. It pushed them to reduce some exposure on the greenback before the FOMC publishes his statement.

Before 20.00 CET the EUR/USD topped almost the 1.1200 level. With 200 pips appreciation in one day the message from the Fed would have to be ultra dovish to push the EUR/USD appreciation higher. As a result, after the statement the most heavily traded pair dropped, but it does not mean that the Committee was hawkish.

Firstly, the Federal Reserve announced that the growth “slowed during the winter months”, while in March the Committee claimed, it “has moderated somewhat”, and in January it was “solid”. According to the Fed the recent slowdown is “in part reflecting transitory factors”.

The description of the labor market also worsened. Slightly more than a month ago, the Committee claimed that the “Labor market conditions have improved further with strong job gains”, while yesterday the Fed claimed that “the pace of gains moderated”. Descriptions of business fixed investments and housing are also fairly pessimistic.

Positive remarks which were made about the future haven't changed and the Fed still expects the economic activity to expand at a moderate pace. The FOMC is also bullish on consumer income and confidence. Overall, it is worth noting that the Fed presented a large number of negative issues which should suggest that odds for any rate hikes before September are small.

In the coming days, any macro reports would be closely scrutinized by the market participants. Moreover, any statements from key Fed members (tomorrow at 20.25 CET John Williams is scheduled to speak) would be carefully listened to. Regarding the dollar the odds for a further slide are pretty large. It is also almost certain that if the incoming data fails to meet consensus it would cause a major reaction on pairs with the dollar.

Foreign markets in a few sentences

Both the GDP readings from the US and the quite dovish Federal Reserve statement pushed some long dollar positions to capitulate. It caused the EUR/USD to top 1.1250 during the European session. Such a strong appreciation trend will not last long, but other dovish statements and weak data can further push the dollar to the downside.

A good opportunity for higher volatility might be the Chicago reading. Expectations are low (50), but significantly higher than the readings in the previous months. More important, however, will be Friday's ISM and readings in the next week. If Friday's payrolls turn out to be below 200k, the September hike might be questioned. It would be another reason to cut long positions on the dollar. As a result, the return to an appreciation on the dollar can be moved by a few months.

The zloty slightly weaker to the euro

The zloty lost some value at the beginning of the day. It was probably a result of some issues on the debt market. Yields on European debt rose significantly and it was also followed by the slide on other fixed income EM instruments. It caused pressure on the zloty, despite the fact that the reaction was too nervous. The ECB's QE should be continued for more than a year and if the inflation returns it would mean better economical conditions, which should also be transferred to the regional economies and cause a faster monetary tightening than in the eurozone.

Therefore,the euro should be traded around 4 zloty and a slide is possible when the sentiment on the debt market eases somewhat. The scenario for the EUR/PLN to drop to around 3.80-3.85 is still valid but the probability for such a strong slide eased due to some appreciation of the dollar on the broader market.

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

Anticipated levels of GBP/PLN according to the GBP/USD rate: