The rebound of the EUR/USD has quite a fragile basis. Statements from the Federal Reserve members regarding changes in fiscal policy, as well as higher evaluation of the dollar. The zloty remains very weak against the main currencies. However, the Polish currency may work-off a portion of its losses, due to the MPC meeting, as well as to the decision from the ECB.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- No macro data that could significantly impact the analyzed currency pairs.
Euro works-off its recent decline
Yesterday, the EUR/USD surprisingly increased to the level of 1.08. Taking into consideration that this pair was near the level of 1.10 before the American elections, it managed to work-off more than 50% of its recent losses.
What’s interesting is that the dollar hasn’t lost much value against the other currencies. We may come to a conclusion that the euro’s behavior was caused by the fact that the negative scenario regarding the Italian referendum didn’t fulfill. The majority of investors most likely decided to cancel their positions, which were set on a decrease in the euro’s value. This caused it to grow and thus a sudden rebound.
Moreover, there have been speculations that Mario Draghi may be less dovish than expected. However, we think that it’s very unlikely that the European monetary authorities won’t fulfill the market expectations or begin to suggest that the QE should be faded out. This is especially taking into consideration that the base case inflation is at the level of 0.8% YoY and there’s no signals of its acceleration for the time being. Therefore, even if the EUR/USD is relatively high, the differential of the future interest rates should limit growth, as well as speak in favor of return to depreciation trends.
Comments from Fed
Three members of the Federal Reserve made their statements yesterday (Dudley, Evans, Bullard). They all have referred to potential changes in fiscal policy and their impact on the economy. These statements were mostly positive. The Chicago Fed chairman, Charles Evans, suggested that infrastructural expenses and the reform of company taxes would support the economy. James Bullard claimed that deregulation, infrastructure and changes in taxes may increase productivity. However, William Dudley’s comments were the most interesting regarding the dollar’s evaluation.
Dudley was interviewed by Steve Liesman of CNBC, who asked about potential negative consequences of higher interest rates and the stronger dollar for the economy. The New York Federal Reserve chairman (who’s views are often shared with Janet Yellen) said that, “Well, if the dollar’s firm because people view the US’s economy as having better outlook, that’s certainly a good thing. I think generally currency strength tied to people’s perceptions about the health of an economy is a positive element and rising stronger currency is also consistent with rising living standards. So that’s not something I would be particularly concerned about.”
Dudley’s statements may suggest that the Federal Reserve will not worry about higher evaluation of the dollar, when it comes to making decisions regarding rate hikes. This may be a very significant information for the fist half of 2017. At that time, a higher inflation pressure from raw materials or announcements of soothing the fiscal policy, most likely will become an argument for monetary tightening in March.
Zloty remains weak
The zloty remains in a bad condition. The Polish currency lost more than 7% against the dollar. This is approximately the same as the Mexican peso (7.43%) and definitively more than the forint (5.66%). However, it is becoming more likely that the PLN sale is slightly exaggerated, even if we take slower economic growth and a decrease in retirement age into consideration.
It’s possible that tomorrow’s MPC meeting will appear positive for the zloty. If the Council clearly suggests its neutral monetary attitude, the speculations regarding monetary easing will appear unjustified. This may be the first element that would take the EUR/PLN 0.02-0.03 PLN above the level of 4.50.
There’s also a large chance that the ECB meeting will become an argument in favor of the euro’s wear-off. Even though that the recent hours have introduced some chaos into evaluation of the euro, we can expect Mario Draghi to sustain his mild attitude towards monetary policy. Moreover, there should be no suggestions regarding the QE fade out. Therefore, the EUR/PLN should end this weak near the 4.45 level, instead of reaching it’s five-year peaks at the level of 4.55.