Support for the euro (Afternoon analysis 10.04.2018)

Ewald Nowotny's comments on the quantitative easing and the prospects for raising interest rates support the euro. The zloty tries to break out of the 4.19-4.21 per euro.

Nowotny about monetary policy

In the afternoon, comments from Ewald Nowotny, a relatively neutral member of the ECB, attracted some market attention. In an interview for Reuters, he suggested ending the quantitative easing by the end of the year and increasing the deposit rate at an unspecified date. This resulted in an EUR/USD pair exceeding the 1.2350 level.

Nowotny's suggestions in the context of QE should not be a surprise for the market. It can be stated that the completion of the increase in the ECB's balance sheet at the end of the year was a base scenario.

On the other hand, the issue of the deposit rate is quite interesting. No specific deadline has been given, but the actual interval of change seems to be a bit greater than previously speculated. The deposit rate was expected to increase by 0.1 percentage points at first, while now the new rate is expected to grow by 0.2 percentage points to minus 0.2 percentage points.

To some extent, the time at which this comment was made has a positive impact on the euro. Recently, data from the eurozone has been weaker than expected. Moreover, there are also fears of a trade war and, as a result, a slightly worse global economic situation. It can be seen, however, that the ECB is not concerned about these issues since Nowotny decides to make such comments. This may have been the main reason why the euro is more expensive in relation to the dollar than it was in the morning.

Strong zloty

Relatively positive market sentiment and lack of dollar appreciation during the increases in the US market favour the zloty. The EUR/PLN pair tries to breach the 4.19-4.21 fluctuation range. Currently, in the core scenario, the national currency is not strengthened but recent days have shown that the zloty is coping well with external risks.

During tomorrow's session, it is worth mentioning a few important events. On the domestic market, we have the MPC meeting. The Council should be dovish given the surprisingly low inflationary pressure. This may depreciate the zloty. The Polish currency may also be negatively affected by a higher than consensus inflation reading from the USA and minutes from the last FOMC meeting, which if we ignore Jerome Powell's press conference, was rather hawkish. Therefore, the zloty may depreciate tomorrow. This fact should also hamper its further strengthening in the coming hours.