The EUR/USD returned to around 1.1800. Despite the short-term increase in volatility, it has not distorted the trend in main currencies. The Polish currency appreciated slightly, but taking into account global events, recent days have been negative for the national currency.
The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.
2:30 p.m.: November's industrial production in the USA (estimate: 0.3% MOM).
Many meetings but no signals for the market
Central bank representatives may consider the end of the week to be positive. Statements from the European, US, Swiss and British monetary authorities did not cause serious disturbances on the market. Some investors, as we have mentioned in the last few days, speculated about a possibly of a more hawkish message from the Fed. This idea has not come to fruition, but it is possible that it will be implemented in the first few months of next year.
The absence of serious changes in the market also confirmed EUR/USD behaviour. The week began close to 1.1800, and the first part of Friday's trading was taking place near that boundary. In the light of market speculation and a slightly dovish FOMC meeting, yesterday's SNB, ECB and BoE meetings did not change the fundamental attitude of these institutions in any specific way.
The Swiss still believe that their currency is too strong and they suggest an intervention to weaken it. The chance of any rate hikes over the next two years seems to be limited. Therefore, the franc's appreciation should not be a core scenario, and if the economic situation of the eurozone continues to be good, it should continue to depreciate.
The British monetary policy, in turn, is connected with the Brexit issue and inflationary pressure. The first element still seems to create uncertainty in the future, which disturbs rather than helps to tighten the monetary conditions of a developed country. Moreover, it is likely that inflation in the following quarters is likely to be declining from its current level of 3.1% because its source is linked to currency depreciation rather than internal processes. The impact of the weaker pound in 2016/2017 will be reduced due to a lower base, which in turn will support an increase in interest rates. It seems that even one increase in the perspective of the next year may be at risk.
In turn, the EBC seems to have one of the most clearly defined paths in the monetary policy. The QE tapering will likely expire by the end of next year. In Q1/Q2 of 2019, speculations may arise regarding the necessity of raising the negative deposit from -0.4%. A clearer acceleration of this process is unrealistic due to very limited inflationary pressure (November was only 0.9% YOY in core terms). So what could disturb it?
The Federal Reserve has the power to change the expected path of future interest rates. In the case of the USA, the economic recovery lasts the longest can be expected that the acceleration of the pace of wage growth will be observed relatively quickly and therefore higher inflation caused by factors outside the commodities market.
As a result, the outlook of the entire currency market depends on when the deeper inflationary pressure will appear and whether it will happen in the USA. Taking into account the current changes in the fiscal policy and the increase in infrastructure investments during the business cycle, it may appear very quickly. A counter-argument to this theory may be the fact that a very similar conclusion could have been drawn a year ago. As a result, the market is likely to wait for "hard data" that suggests a real change in inflation or wage trends. Until this happens, the dollar may remain relatively weak. However, if the convincing signals for accelerating the price process appear, then the dollar's appreciation can be quite rapid.
Zloty's weaker behaviour
The past few days have been characterised by a noticeable deterioration in the zloty's condition. This isn’t due to the euro's appreciation (by 0.2 PLN) since the beginning of the week, but due to the fact that this happened when there were no signs of foreign monetary policy tightening. Therefore, it is still difficult to determine whether this is a reversal of the upward trend (e.g. caused by fear of a stronger dollar in the following months) or just a short-term adjustment.
In some ways, investors may doubt whether the MPC will decide to raise interest rates in 2018. The market is somewhat valuing an increase in interest rates by 0.25 percent for the year’s perspective. However, despite rising inflation, the Council does not suggest a change of position. Therefore, some market participants may doubt whether the change currently calculated in the rates will actually take place. If the stance that it has does not prevail, the pressure on the zloty may also increase due to local factors.
The past few hours brought a minimal decrease of the EUR/PLN and its depreciation below the 4.22 boundary, but the zloty did not pare losses in relation to the forint. This should not really occur in the coming days by taking into account the external situation. It seems that only the return of the euro to the 4.20 PLN level will result in the negation of the last PLN weakening.
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.
The EUR/USD returned to around 1.1800. Despite the short-term increase in volatility, it has not distorted the trend in main currencies. The Polish currency appreciated slightly, but taking into account global events, recent days have been negative for the national currency.
The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.
Many meetings but no signals for the market
Central bank representatives may consider the end of the week to be positive. Statements from the European, US, Swiss and British monetary authorities did not cause serious disturbances on the market. Some investors, as we have mentioned in the last few days, speculated about a possibly of a more hawkish message from the Fed. This idea has not come to fruition, but it is possible that it will be implemented in the first few months of next year.
The absence of serious changes in the market also confirmed EUR/USD behaviour. The week began close to 1.1800, and the first part of Friday's trading was taking place near that boundary. In the light of market speculation and a slightly dovish FOMC meeting, yesterday's SNB, ECB and BoE meetings did not change the fundamental attitude of these institutions in any specific way.
The Swiss still believe that their currency is too strong and they suggest an intervention to weaken it. The chance of any rate hikes over the next two years seems to be limited. Therefore, the franc's appreciation should not be a core scenario, and if the economic situation of the eurozone continues to be good, it should continue to depreciate.
The British monetary policy, in turn, is connected with the Brexit issue and inflationary pressure. The first element still seems to create uncertainty in the future, which disturbs rather than helps to tighten the monetary conditions of a developed country. Moreover, it is likely that inflation in the following quarters is likely to be declining from its current level of 3.1% because its source is linked to currency depreciation rather than internal processes. The impact of the weaker pound in 2016/2017 will be reduced due to a lower base, which in turn will support an increase in interest rates. It seems that even one increase in the perspective of the next year may be at risk.
In turn, the EBC seems to have one of the most clearly defined paths in the monetary policy. The QE tapering will likely expire by the end of next year. In Q1/Q2 of 2019, speculations may arise regarding the necessity of raising the negative deposit from -0.4%. A clearer acceleration of this process is unrealistic due to very limited inflationary pressure (November was only 0.9% YOY in core terms). So what could disturb it?
The Federal Reserve has the power to change the expected path of future interest rates. In the case of the USA, the economic recovery lasts the longest can be expected that the acceleration of the pace of wage growth will be observed relatively quickly and therefore higher inflation caused by factors outside the commodities market.
As a result, the outlook of the entire currency market depends on when the deeper inflationary pressure will appear and whether it will happen in the USA. Taking into account the current changes in the fiscal policy and the increase in infrastructure investments during the business cycle, it may appear very quickly. A counter-argument to this theory may be the fact that a very similar conclusion could have been drawn a year ago. As a result, the market is likely to wait for "hard data" that suggests a real change in inflation or wage trends. Until this happens, the dollar may remain relatively weak. However, if the convincing signals for accelerating the price process appear, then the dollar's appreciation can be quite rapid.
Zloty's weaker behaviour
The past few days have been characterised by a noticeable deterioration in the zloty's condition. This isn’t due to the euro's appreciation (by 0.2 PLN) since the beginning of the week, but due to the fact that this happened when there were no signs of foreign monetary policy tightening. Therefore, it is still difficult to determine whether this is a reversal of the upward trend (e.g. caused by fear of a stronger dollar in the following months) or just a short-term adjustment.
In some ways, investors may doubt whether the MPC will decide to raise interest rates in 2018. The market is somewhat valuing an increase in interest rates by 0.25 percent for the year’s perspective. However, despite rising inflation, the Council does not suggest a change of position. Therefore, some market participants may doubt whether the change currently calculated in the rates will actually take place. If the stance that it has does not prevail, the pressure on the zloty may also increase due to local factors.
The past few hours brought a minimal decrease of the EUR/PLN and its depreciation below the 4.22 boundary, but the zloty did not pare losses in relation to the forint. This should not really occur in the coming days by taking into account the external situation. It seems that only the return of the euro to the 4.20 PLN level will result in the negation of the last PLN weakening.
See also:
Afternoon analysis 14.12.2017
Daily analysis 14.12.2017
Afternoon analysis 13.12.2017
Daily analysis 13.12.2017
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