The euro-dollar market was broadly stable during the first days of the week, until the European single currency was hit by the dovish ECB. The European central bank has left interest rates unchanged, as expected. However, President Trichet´s statement did not indicate that the rates will go up in June and surprised those who speculated on rather aggressive tightening this year. After this ECB meeting it seems that the rates will remain stable in June and then will be rising more slowly. The reaction of the euro was sharp; it has lost some 2 pct to the dollar. Considerable amount of bets on the hawkish ECB and the dovish Fed were probably canceled.
News from the US economy was mixed. On the one hand, sub-indices in the ISM reports brought negative surprise and also the ADP employment change and the jobless claims were worse than expected. On the other hand, nonfarm payrolls increased significantly. The overall picture is therefore not negative for the dollar as it still leaves room for speculations about the Fed´s exit from the loose policy.
Although the main global markets showed significant swings, the koruna remained resilient. Its daily changes were small and not consistently linked to the situation on the major markets.
In the Czech Republic, the most important event was the CNB monetary meeting. The interest rates were kept on hold, as the market had expected. The central bank revealed the basic figures from its new staff projection. The new projection suggests slightly lower GDP growth and higher inflation than the previous projection. The changes are marginal. A more interesting point is that the CNB expects the koruna to strengthen faster, compared with the previous outlook. As for the policy outlook, the new staff projection still suggests the first rate hike to come in the 4Q. The risks for inflation are considered to be balanced. However, Governor Singer said that the rates might be raised a bit faster. Overall, we see the meeting as slightly positive for the koruna. Also the fact that the ECB has put off another hike should be supportive. However, the Czech currency did not react immediately and its weekly gains are only modest.
The May set of Czech macro data has started with retail sales. The figure was below consensus and showed that the domestic consumer demand remains subdued. After the good results of the previous months, the growth in retail sales slowed again; the indicator is still quite volatile. The koruna was uninspired by the data. (2313 GBp, -0,56%) week the most interesting points in the Czech calendar are inflation and the first estimate of the 1Q GDP. They will show whether the economy is still tracking the German expansion and whether the growth is still not generating inflationary pressures. This may potentially influence also the expectations about rates.
GDP reports from the Eurozone, retail sales from the US and a set of Chinese data will be the most important macro releases in the world. They will be closely watched because of implications for monetary policy. European debt remains an issue but the FX market reactions to the last news were quite lukewarm.