The US price index, excluding energy and food prices, failed to meet market expectations in November and weakened the dollar. The evening FOMC message may turn out to be more dovish than the expectations of some market participants. The zloty may appreciate if the dollar weakens.
Inflation in the US in line with expectations
The data on November’s consumer inflation (CPI) in the USA failed to meet expectations. Although the main reading was in line with market consensus (2.2% per year), the much more important core index (excluding energy and food prices) fell from 1.8% to 1.7%. Therefore, the suppressed inflation trends in the USA have been observed, which may make it difficult to make decisions on interest rate increases in the following year.
The dollar a moment after the inflation data publication, clearly depreciated. The EUR/USD quotations increased from approx. 1.173 to 1.177 and the dollar index (DXY) returned below 94 points. Apart from the publication of the Federal Reserve statement (at 8.00 p.m.) and the subsequent Janet Yellen's press conference at 8.30 p.m., the calendar of scheduled events that could have a significant impact on the main currencies' quotations is practically empty.
During the last few days, a gradual dollar appreciation could be observed as the FOMC meeting was approaching. Rate hikes are widely expected and have probably already been fully priced in by the market. However, it could be observed that some market participants expected tightening of the FOMC message.
The probability of such a scenario seems to be rather limited. The data from the US economy indicated that there is inflationary pressure, which reduces the chance of raising the number of rate hikes from three to four in 2018 during today's meeting. In addition, in the context of worse than expected consumer inflation data for November, the US dollar may lose significantly, if FOMC's message turns out to be relatively dovish. In this case, the EUR/USD quotations could exceed even the 1.18 level.
Will zloty be stronger?
The Polish currency's quotations have mainly followed the external factors. The dollar's appreciation in recent days has caused a slight pressure on the zloty - the EUR/PLN quotations of around 4.20 - 4.21 moved to the 4.21 - 4.22 level. However, the aforementioned negative information for the dollar on inflation is theoretically good for the zloty. As a result, the probability of a significant depreciation today is limited.
Key events of today's evening are FOMC statement and Janet Yellen's press conference (the President of Fed). The relatively hawkish statement and conference may, despite weaker data today, strengthen the dollar, if the probability of 3 or 4 interest rate increases in 2018 were increased.
Currently, however, the data from the US economy that has been received on the continuous inflationary process is unlikely to support a tightening of the FOMC and Yellen's stance. It is more likely that the current statement (or even its more dovish tone) will be maintained which could weaken the dollar. Demand for emerging countries' currencies could, therefore, increase, which would be favourable for the zloty and it could appreciate by 2-3 gr in relation to the dollar.
Tomorrow's preview
Tomorrow preliminary December data on PMI indexes for the manufacturing and services sectors in France (9:00 a.m.), Germany (9:30 a.m.) and the euro area (10:00 a.m.) will be published. Excluding the slight increase expected in the service index in Germany, the market consensus points to a slight decrease in these indexes. However, in recent months, they have reached multi-year highs, so even slightly lower levels this month would still mean a high activity pace in both sectors. Therefore, the response of the euro may be limited, in particular in the context of today's Federal Reserve statement and press conference following the ECB meeting later on.
From the pound's perspective, a statement and a record (minutes) of the talks after the Bank of England meeting (1:00 p.m.) will be very important events tomorrow. The level of interest rates or the bond-purchase program will most probably remain unchanged.
However, the member's expectation of future interest rate level may be important, taking into account the suggestions from the members of the UK central bank that the next increase will not be made quickly. Tightening this statement could strengthen the pound slightly. Although the probability increased after better than expected inflation data in November, this scenario is still unrealistic. Therefore, an increase in the pound's fluctuation range can be observed, although the final change in its value does not have to be significant.
The European Central Bank (ECB) will publish minutes on monetary policy after the two-day meeting. Changes in the ECB's monetary policy are not expected. The publication of the statement and the subsequent press conference by Mario Draghi (2:30 p.m.), President of the ECB, may increase the euro's volatility, although it does not need to change significantly. Recent inflationary readings did not indicate any changes in the trend, therefore the probability of modifying ECB message seems to be limited.
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 US price index, excluding energy and food prices, failed to meet market expectations in November and weakened the dollar. The evening FOMC message may turn out to be more dovish than the expectations of some market participants. The zloty may appreciate if the dollar weakens.
Inflation in the US in line with expectations
The data on November’s consumer inflation (CPI) in the USA failed to meet expectations. Although the main reading was in line with market consensus (2.2% per year), the much more important core index (excluding energy and food prices) fell from 1.8% to 1.7%. Therefore, the suppressed inflation trends in the USA have been observed, which may make it difficult to make decisions on interest rate increases in the following year.
The dollar a moment after the inflation data publication, clearly depreciated. The EUR/USD quotations increased from approx. 1.173 to 1.177 and the dollar index (DXY) returned below 94 points. Apart from the publication of the Federal Reserve statement (at 8.00 p.m.) and the subsequent Janet Yellen's press conference at 8.30 p.m., the calendar of scheduled events that could have a significant impact on the main currencies' quotations is practically empty.
During the last few days, a gradual dollar appreciation could be observed as the FOMC meeting was approaching. Rate hikes are widely expected and have probably already been fully priced in by the market. However, it could be observed that some market participants expected tightening of the FOMC message.
The probability of such a scenario seems to be rather limited. The data from the US economy indicated that there is inflationary pressure, which reduces the chance of raising the number of rate hikes from three to four in 2018 during today's meeting. In addition, in the context of worse than expected consumer inflation data for November, the US dollar may lose significantly, if FOMC's message turns out to be relatively dovish. In this case, the EUR/USD quotations could exceed even the 1.18 level.
Will zloty be stronger?
The Polish currency's quotations have mainly followed the external factors. The dollar's appreciation in recent days has caused a slight pressure on the zloty - the EUR/PLN quotations of around 4.20 - 4.21 moved to the 4.21 - 4.22 level. However, the aforementioned negative information for the dollar on inflation is theoretically good for the zloty. As a result, the probability of a significant depreciation today is limited.
Key events of today's evening are FOMC statement and Janet Yellen's press conference (the President of Fed). The relatively hawkish statement and conference may, despite weaker data today, strengthen the dollar, if the probability of 3 or 4 interest rate increases in 2018 were increased.
Currently, however, the data from the US economy that has been received on the continuous inflationary process is unlikely to support a tightening of the FOMC and Yellen's stance. It is more likely that the current statement (or even its more dovish tone) will be maintained which could weaken the dollar. Demand for emerging countries' currencies could, therefore, increase, which would be favourable for the zloty and it could appreciate by 2-3 gr in relation to the dollar.
Tomorrow's preview
Tomorrow preliminary December data on PMI indexes for the manufacturing and services sectors in France (9:00 a.m.), Germany (9:30 a.m.) and the euro area (10:00 a.m.) will be published. Excluding the slight increase expected in the service index in Germany, the market consensus points to a slight decrease in these indexes. However, in recent months, they have reached multi-year highs, so even slightly lower levels this month would still mean a high activity pace in both sectors. Therefore, the response of the euro may be limited, in particular in the context of today's Federal Reserve statement and press conference following the ECB meeting later on.
From the pound's perspective, a statement and a record (minutes) of the talks after the Bank of England meeting (1:00 p.m.) will be very important events tomorrow. The level of interest rates or the bond-purchase program will most probably remain unchanged.
However, the member's expectation of future interest rate level may be important, taking into account the suggestions from the members of the UK central bank that the next increase will not be made quickly. Tightening this statement could strengthen the pound slightly. Although the probability increased after better than expected inflation data in November, this scenario is still unrealistic. Therefore, an increase in the pound's fluctuation range can be observed, although the final change in its value does not have to be significant.
The European Central Bank (ECB) will publish minutes on monetary policy after the two-day meeting. Changes in the ECB's monetary policy are not expected. The publication of the statement and the subsequent press conference by Mario Draghi (2:30 p.m.), President of the ECB, may increase the euro's volatility, although it does not need to change significantly. Recent inflationary readings did not indicate any changes in the trend, therefore the probability of modifying ECB message seems to be limited.
See also:
Daily analysis 13.12.2017
Afternoon analysis 12.12.2017
Daily analysis 12.12.2017
Afternoon analysis 11.12.2017
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