Daily analysis 19.12.2017

19.12.2017 12:33|Marcin Lipka

The EUR/USD pair close to 1.1800 boundary before the final of the tax vote in Congress. Ifo index was slightly weaker, but still close to historical records. Kashkari explained why he voted against the increase in interest rates. The zloty slightly appreciated before the macroeconomic data from Poland.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • 2:00 p.m.: Industrial production from Poland for November (estimates:9.6% YOY),
  • 2:00 p.m.: Retail sales from Poland for November (estimates: 7.4% YOY),
  • 2:30 p.m.: Building permits and started new investments in the US real estate market in November (estimates: 1.27 and 1.25 million annualised respectively).

Dollar insensitive to tax issues

Yesterday, for the 70th time this year, the US indexes beat historical records. Some of these increases are likely to be related to the constantly increasing chances of tax changes prepared by the Republicans to enter into force.

According to Bloomberg news agency, this afternoon in the House of Representatives, the final version of the tax law will be voted on. However, it is not entirely clear when the Senate will work on the law. Moreover, Fox Business also wrote that today or tomorrow, the law will be voted on by the US Congress upper chamber. This means that President Trump's plan to sign tax changes is still valid before Christmas.

However, the positive impact of these events on the share market did not affect the dollar's condition. The currency market and to some extent also debt instruments probably want to see the real impact of these changes on inflation or at least want to wait for readings that will indicate the increasing pressure on price increases.

Slight decrease of Ifo index. Kashkari about his opposition vote

In the morning, data from German Ifo Institute were released. It still shows one of the best historical business climate indexes. The overall index value decreased slightly (from 117.6 to 117.2 pts) and was below market expectations (117.5 pts).

This was mainly due to a sentiment deterioration in the industry and wholesale sales. Construction and retail sales appeared to be better. All the time, the message from Ifo remained clearly positive, which is well summarized in the Institute's opinion that German entrepreneurs are full of Christmas spirit.

Yesterday, Neel Kashkari expressed his reasons for giving the opposite vote on the interest rate increase by the Fed during December's meeting. The President of the Minneapolis Federal Reserve claimed that he did not support monetary tightening due to the fact that inflation did not move toward the target. He also believes that inflation expectations seem to be flat and maybe even decrease.

Charles Evans had previously published a similar explanation of his decision. The FOMC representative from Chicago (also did not support the increase) was concerned about long-lasting factors, not just temporary ones, which keep inflation at a low level. He also believed that too many market observers treat the 2% inflation target as a "ceiling" rather than a symmetrical value from which deviations both up and down can be observed.

The above statements, although they are well known to the market, may diminish the chances of a hypothetical dollar appreciation. It can be seen that some of the FOMC members may be reluctant to further increase the credit cost, especially if inflation is still below target.

Positive sentiment helped zloty

Maintaining very good global market sentiment, with no significant increases in yields of the US Treasury bonds (no inflationary pressure) and the relatively weak dollar, cause the EUR/PLN to be close to 4.20 level. These are the lower volatility values of recent days.

After 2.00 p.m., data from the national economy will be published. Economists consensus indicates significant growths in both industrial production (9.6% YOY in November) and retail sales (7.4% YOY in the previous month). Slightly better or slightly worse readings should not clearly affect the zloty condition. Probably only much stronger data (approximately 2 percentage points above the consensus) may result in an attempt to test the limit of 4.20 on the EUR/PLN pair.

Taking into account the persisting dovish attitude of the MPC and the low probability that this data would change the current approach of the Council, chances of a successful test of this level remained limited.

 


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