China pours out a bucket of cold water on a long-term deal with the USA (Daily analysis 31.10.2019)

The dollar is slightly weaker following the decision to cut interest rates, but the scale of the changes is limited. Better than expected macro data from the eurozone reduce concerns about a strong economic slowdown. The zloty remains in a small fluctuation range but is still in a relatively good condition.

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

• A lack of macro data may noticeably impact the analyzed currency pairs.

Powell wants strong inflation in relation to increase in interest rates

One of the key events of the week is over - the statement of the Federal Open Monetary Committee (FOMC) in the USA. As expected, interest rates were cut by 25 basis points to 1.50-1.75%. Both the statement and the press conference of Jerome Powell signalled that after three FOMC cuts of 25 points, it finally indicated that it would pause further cuts. The next steps will depend to a greater extent on macroeconomic data coming from the US economy.

It was expected that the cut would turn out to be relatively "hawkish". Powell identified the progress in the US-China trade negotiations as one of the reasons for this move. Initially, the market reacted with the strengthening of the dollar. However, there was a quick turnaround, and the US currency weakened.

On the one hand, the market may not have fully believed in the "hawkish" tone of this cut. FOMC might have wanted to leave more cards in its hands if the economic situation had worsened. On the other hand, Powell also set the bar high for raising interest rates by stating that a strong increase in inflation would be needed. It is now relatively subdued and shows no sign of a strong increase. This may suggest that an increase in interest rates in the coming year or even in the longer term is practically ruled out. The dollar depreciated slightly, but the EUR/USD exchange rate has not even exceeded the 1.1200 boundary. Therefore, there is no significant movement, especially as on Friday the labour market report from the USA will be published, which may reverse this situation.

Chinese suggestion on the US elections

Today, some macro data have also been published from the eurozone. Taking into account all the fears about the state of the European economy, there was a positive surprise. Consumer inflation (CPI) in the eurozone in October was 1.1% year-on-year, 0.1% percentage points above expectations. This is not much, but if we add to that the eurozone was developing at a pace of 0.2% per month in Q3, the economic picture is slightly better. However, the impact of these data on the euro was limited, perhaps due to a relatively negative signal from the US-China trade negotiations.

For several weeks now, there have been no signs of fears in the market about international trade, because the talks between the representatives of China and the US were aimed at concluding an interim agreement. Meanwhile, today, Bloomberg reported that China does not expect to reach a long-term agreement with President Donald Trump. There is no coincidence that China is mentioning Trump. Presidential elections are being held in the United States next year, and the process of Trump's impeachment has also begun, so there is a good chance that the Chinese authorities will negotiate with another resident in the White House next year.

This information worsened sentiment in the market slightly, casting some shadow on the actual progress of trade negotiations. However, the impact was limited. Due to a slight weakening of the dollar after yesterday evening with the Federal Reserve, a positive signal was sent to the euro in the form of good macro data and a telegram from China. As a result, the EUR/USD exchange rate was in the relatively narrow range of 1.1145-1.1175. This is still above yesterday's level (about 1.1100 during the day, with a temporary drop to 1.1080 after the FOMC statement), but on Friday, around the publication of the report on the US labour market, a significant extension of the range can be expected.

Zloty awaits Friday

No significant changes observed on the broader market result in a relatively good condition of the Polish currency. The EUR/PLN exchange rate oscillates around 4.26 PLN and the USD/PLN pair around 3.81 PLN. It is most likely that Friday's data from the USA will evoke greater movement. Although the Polish Central Statistical Office (GUS) presented today preliminary data on consumer inflation in Poland in October, they did not affect the zloty. The inflation amounted to 2.5% per year (as expected) and 0.2% per month (0.1 percentage points below). However, this does not change anything for the Polish MPC, which is practically entirely dependent on non-domestic factors.