ECB moves the markets

So, Mario Draghi made it happen. The interest rate cut by ECB surprised market participants and moved currency prices. More surprisingly, the reaction on the EUR/USD was much stronger than on emerging market currencies. Still, we are observing interesting situation on the graphs. In Poland, the market was also awaiting the MPC interest rate decision. The outcome was expected – interest rates were kept unchanged at 2.5%. What was said in a more straightforward manner was that the MPC will start cutting interest on the next meeting. At least it sounded straightforward. The reaction of the market was not so strong as all the economic data indicated such move should be expected. The only macro data published this week, the Manufacturing PMI, remained at 49 points. Projected inflation also remains well below the target. I am only surprised the MPC is waiting so long to cut rates, again. Of course, we will see if this will happen on the next meeting. What also helped Zloty bulls were the news that Russia and Ukraine are working on how to stop the fight and possible peace.

On the daily chart we see the EUR/PLN retreated from levels above 4.20. The downward move continued until reaching 4.17 but the support of 4.1750 (41.4% retracement of the last upward move) was not broken. If the PLN bullas want to pull the market further down, the support will be attacked again next week. If broken, the next target should be 4.1450 (61.8%). For an upward move, 4.22 remains the barrier to be broken.

It seems the Hungarian government will rethink levies to be implemented on the financial sector. On Tuesday, Economy Minister Mihály Varga said the government will start the conversion of foreign currency loans into Forints next year. Good news for the Hungarian currency and less fights between the banking sector and the government could bring more peaceful times for the equity and bond markets.

Furthermore, the possible Ukraine-Russia ceasefire and the positive Hungarian GDP data helped the Forint to regain value in the last couple of days. Based on the Central Statistical Office’s (KSH) final report, the gross domestic product increased by 3.9% in the second quarter of 2014. We see some backsliding in the agricultural sector due to worse weather. On the other hand, the construction and industrial sector are getting stronger and stronger. We have only one crucial macro publication coming up next week - the National Bank of Hungary's Meeting minutes where we will get to know how many members voted to keep the main interest rate at 2.10%.

As we see on the daily chart, it is visible the EUR/HUF closed the last week at March highs but the ECB stimulus pushed it back into the blue rectangle. We do not expect much volatility next week on the Forint, which should move in a 311 – 315 range. Still, the situation in Ukraine will be the main determinant of major moves.

Romania’s economy has been confirmed to have entered a technical recession in Q2, with a 1% q/q contraction, however the RON managed to maintain its temper. That may be because observers see this as a temporary blip, led by conjunctural low (rather drastically) public investment and weaker relative agricultural performance, to be at least partially reversed later in the year. At the same time, very low inflation and the NBR mild preference for a weaker RON may have been balanced by improving outlook for a ceasefire in Ukraine and then the new Mario show. Therefore next week may deliver moderate (at most) fluctuations around 4.4000.

From a technical point of view, a triangle appears even better formed at present conditions. Any move in the 4.3850 – 4.4350 range contributes to the definition of the pattern, and the current suggestion is room may be simplier used upwards. In the short-term, a break of 4.4000 at the daily level may mean first one to watch is 4.4200. Any break below 4.3850 may easily prove worthy of note for traders having in mind the support at 4.3720 and then 4.3600.