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Market reacts in unjustified way (Afternoon analysis 24.09.2018)

24 Sept 2018 16:00|Marcin Lipka

The euro is clearly appreciating during Mario Draghi's speech in the Committee on Economic and Monetary Affairs (ECON), although the head of the ECB did not say anything new. Argentina is talking to the IMF about increasing aid. The zloty remains stable.

The main currency pair breached the 1.1800 level in the early afternoon. Clearly, the movement was generated on the Old Continent as the rises were accompanied by a speech by Mario Draghi in the European Parliament.

It is worth noting, that according to the content of the speech published on ECB's website, Draghi did not say anything new. Sometimes, the market reacts to information that is already well known. This time it could have been similar, especially as Bloomberg highlighted the following information in red: "Draghi sees a relatively rapid rise in core inflation.”

Such a statement could suggest that the ECB has some new inflation data compared to September 13th when the last meeting of the central bank took place. That is not true. The sentence is just a commentary on the ECB's core inflation estimates published less than two weeks ago. Core inflation is expected to reach 1.8% y/y in 2020 (0.1pps less than estimated in June). The same value can be seen in the forecasts from September 13th as well as in the next part of Draghi's speech in Parliament.

The rest of the head of the ECB's conclusions are not surprising either, as he discussed forward guidance policies in recent years rather than focusing on suggestions for upcoming decisions. Therefore, the movement to strengthen the euro seems unjustified, although yields on government bonds have also increased significantly (by about 4 basis points for 10-year instruments in Germany). However, the market may return to previous levels relatively quickly, evaluating that there are no changes compared to the situation two weeks ago.

Apart from the changes in the euro, there is not much important information. For emerging markets, the issue of a possible increase in financial assistance to Argentina by the IMF may be a subject of interest (so far, there has been the talk of 50 billion USD and acceleration of payments to Buenos Aires).

The zloty still remains stable, despite the slightly stronger euro. Fluctuations in the Polish currency are very limited and the EUR/PLN moves close to 4.30. EUR/USD increases support USD/PLN falls, but maintaining this trend is not anticipated, especially as the movement should expire due to the misinterpretation of Mario Draghi's speech.

24 Sept 2018 16:00|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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