Daily analysis 12.10.2017:
The Federal Reserve statement did not allow the US currency to pare past losses. Good industrial production data from the eurozone has been positive for the single currency. The zloty benefits from the dollar's weakness and a good sentiment towards the emerging markets. The EUR/PLN pair tests the area of 4.27 and the CHF/PLN falls below 3.70.
Key macro data (CET time - Central European). Estimates of macro data are based on Bloomberg data unless otherwise noted.
- 2.00 p.m.: September's data on inflation in Poland (estimate: 2.2% YOY),
- 2.30 p.m.: Weekly data on initial jobless claims in the US (estimate: 250k),
- 2.30 p.m.: September's producer inflation in the US (estimates: 2.6% YOY excluding fuels and food 2.0% YOY).
Less hawkish does not mean dovish
Even before the Federal Reserve minutes publication, a gradual fall of the dollar and increases in the main currency pair may be observed. It is possible that an interview with Charles Evans for Bloomberg television contributed to this. With this year's voting power, the President of the Federal Reserve Bank of Chicago said that we should not "be afraid of inflation at 2.5% level" and that we should bring inflation to 2% "as soon as possible." In addition, Evans said that "he is really concerned about low inflation expectations."
Although the President of the Chicago Fed is probably one of the four most dovish members of FOMC (including Brainard, Kashkari and Bullard), these types of statements in the minutes could have increased the chance that there might be a noticeably visible part of the Federal Reserve that is sceptical to raising interest rates further.
These expectations have been somewhat confirmed. Additionally, with a relatively hawkish statement in September, news agencies mainly choose the dovish suggestions from the minutes.
Many members expressed concerns that this year's' low inflation readings may not only reflect the temporary elements but also the impact of events that may be more long-term.
Without referring this passage to the minutes in their entirety, it could be understood that a significant part of the FOMC may start to withdraw from increases. In general, however, there were a lot of other parts of the minutes confirming the desire to maintain the current monetary tightening pace. "Most members expect wage growth in the case of further labour market strengthening." Moreover, "many members continue to believe that cyclical pressure connected with a tightening labour market and the economy that operates on a level that is higher than its potential will translate into higher inflation in the medium term. The minutes may suggest that only three oo four out of sixteen FOMC members have serious concerns about further monetary tightening. This number has not changed significantly since June's meeting, as the distribution of votes on future interest rates in FOMC's projections has shown.
As a result, it can be concluded that minutes were less hawkish than expected, but far from being dovish, which would mean a gradual withdrawal from rate hikes in 2018. However, before we see a more significant inflation increase in the US (mainly core inflation), the market may still doubt further rate hikes by the Fed. This may hamper the dollar from paring recent losses and keep the EUR/USD pair relatively high.
Positive data from the eurozone
In the morning, much better than expected readings have been published from September regarding the eurozone. Industrial production in the single currency area increased by 3.8% YOY (consensus 2.6% YOY). Additionally, August's publication was revised upward by 0.4 percentage points and reached 3.6% YOY. Apart from small countries where production growth, at a pace exceeding 10% YOY, is noteworthy Germany noted strong readings (+4.7% YOY) as did Italy (+5.7% YOY). Data from France did not meet expectations (+1.3% YOY).
The afternoon is limited in the case of macroeconomic readings, but the market will look for elements that will draw its attention before tomorrow's CPI inflation data for September from the US. One of these elements may be the change in production prices last month, especially its components excluding fuel and food. Breaching the 2.1% boundary YOY (consensus of 2.0%YOY) and entering the highest growth rates for more than two years may support the dollar a bit. In the case of a lower reading, the US currency may not have any reason to appreciate.
The zloty supported by global situation
The zloty, similar to the forint, benefits from a good external environment. Other US stock trading records, combined with the lack of growth in the yields of the US government bond and the dollar's depreciation, are ideal conditions for emerging countries' currencies. As a result, the EUR/PLN pair is close to the 4.27 boundary, while the USD/PLN or CHF/PLN are falling to an area near to 3.60 and 3.70, respectively. However, the Polish currency remains unchanged in relation the Hungarian forint and the PLN/HUF is moving slightly below 72.5.
In the afternoon, apart from the US data, a more variables may be caused by September's detailed GUS readings on inflation. If the contribution to the last strong price increase (2.2% YOY) will not only be from fuels or food, it may mean that core inflation is starting to rise above the 1.0% YOY boundary. This information may still support the zloty slightly if external conditions favour the emerging countries' currencies.
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