Daily analysis 06.03.2017

Yellen suggested rate hikes in March and Fischer will most likely support the majority. The French presidential elections have yet again impacted the currency market. The zloty has been moving to the rhythm of the global sentiment. However, the MPC meeting may appear significant as well.

Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.

• No macro data that could significantly impact the analyzed currency pairs.

Hawkish Fed and weaker dollar

Janet Yellen’s testimony on Friday has confirmed the previous statements from the Fed members regarding the monetary tightening in March. The FOMC chairwoman claimed that later this month, “the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”

This statement basically suggests that rate hikes in March are the base case scenario. Yellen’s testimony generally indicated that the monetary tightening will be more intense than it used to be in the previous years. This is because the external dangers for the American economy are no more (data from both China and the euro zone). Moreover, inflation is significantly closer to its goal.

Yellen also confessed that her forecasts have not been including changes in the fiscal policy. Theoretically, such a statement should accelerate the pace of monetary tightening.

Stanley Fischer, the Federal Reserve vice-chairman also made his testimony on Friday. He spoke of the history of central banking and he didn’t refer to the current monetary policy. However, during the Q&A session he suggested that he will support the majority’s opinion regarding rate hikes in March. Moreover, he also took note that basically all macroeconomic data was positive over the past few months.

It seems interesting that the dollar wore-off, despite a hawkish message from the Fed. Even a stable behavior of both the USD and the profitability of the American bonds, would be easier to explain. This is because the previous expectations regarding the monetary tightening have already been confirmed. However, it’s possible that this was an impact of Friday’s session, which was positive for the euro (the presidential election surveys from France). This could have changed the attitude towards the euro in the short-term. A decreasing fear over over the euro’s stability was also reflected in the EUR/CHF, which went towards 1.0700.

As a result, the dollar may meet difficulties in appreciating within the next few days (if we assume the lack of surprises from the American labor market.) Nevertheless, the suggestions from the Fed should support the USD.

French elections

The news from France improved the euro’s condition on Friday, but also deteriorated it today. The EUR/USD lost approximately 40 pips due to the news that Alain Juppe will not represent the French Republican Party in the presidential elections.

Theoretically, Juppe lost the primaries on the Right. However, there has been news that he may replace Francois Fillon (he was compromised by information regarding irregularities in hiring his family members.) According to surveys, this would increase the Republican Party’s chances for victory.

It’s also worth noting that Friday’s survey result from Odox regarding Marine Le Pen’s loss in the first round of the elections, has not been confirmed by two other surveys. According to both Ifop Fiducial and Kantar Sofres, Le Pen would win the first round against Emmanuel Macron, as well as Juppe, who has demented his return to the presidential elections today.

Significant MPC meeting?

The zloty’s situation is stable. The EUR/PLN remains relatively close to 4.30 and the dollar is near the area of 4.07. Recently the zloty has mainly been impacted by the global sentiment, which is determined by anticipation for changes in the Fed’s monetary policy, as well as by news regarding elections in the euro zone.

However, this situation may be slightly disturbed by the MPC meeting on Wednesday. It’s interesting how the MPC members will react to clearly higher inflation forecasts, as well as to increasing chances for faster rate hikes in the USA. If both the announcement and the press conference do not contain any hawkish suggestions and the message from the MPC is generally neutral, this may wear-off the zloty.