Afternoon analysis 05.09.2017

Quite a quiet afternoon for currencies. Key data from the Federal Reserve member's speech may trigger a broader discussion on monetary policy changes. The positive tendency for the zloty is maintained before the MPC meeting tomorrow.

Sentiment on the global FX market has not changed much compared to the trading around midday. The EUR/USD remains close to 1.1900 and the EUR/CHF is at 1.1400 despite very weak data from the Swiss economy.

Also, investors did not react to the publication of Lael Brainard's speech, even though it may be of importance for the forthcoming discussion on further raising of interest rates. Today's presentation from a Fed Board of Governors member may indicate that it is the beginning of migration to opposing further tightening of the monetary policy.

In particular, perhaps, the part of her speech in which Brainard stated that the Fed not only failed to fulfill its inflation target this year, but also did not do so for a long time proclaims that. “We have been falling short of our inflation objective not just in the past year, but over a longer period as well. My own view is that we should be cautious about tightening the policy further until we are confident that inflation is on track to achieve our target,” said Brainard.

It is also worth noting that although similar voices (Bullard, Kashkari) were present at the FOMC, they represented views of the regional Federal Reserve Presidents. If Brainard's opposition to interest rate increases were to happen this year, then we would have to deal with the opposition within the Board of Governors alone. First of all, this is relatively rare, and Brainard's arguments are the first symptom of a general change in FOMC attitude to future movements.

A clue in the context of the dollar will be the September Federal Reserve session, which starts in two weeks. If during the press conference or in the macroeconomic projections a far more profound approach of the FOMC members is observed, then the planned interest rate increase would be questioned in December. That would also increase the probability of further US currency depreciation.

Zloty stabilization

The national currency maintains its gains since the beginning of the week. Currently, the zloty is the third strongest currency among the 31 currencies presented by Bloomberg. It is therefore clear that investors have welcomed recent reports from Moody on raising Poland's economic growth prospects and lowering projections for the public finance sector deficit for 2017.

Tomorrow, however, in the context of the national currency, it is worth paying attention to the MPC meeting. As the Council had traditionally a holiday break over the past two months, and after strong data from the domestic economy (especially consumption), some members may openly suggest monetary policy tightening. If this happens tomorrow, then PLN could also receive support from the national monetary authorities.