Daily analysis 11.05.2017

Rosengren of the Federal Reserve wants three more rate hikes this year and a reduction in the Fed’s balance. The British data appeared to be disappointing. The zloty’s quotations have been stable. The franc was testing the range of 3.83-3.84 PLN.

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

• 13.00: The decision regarding British interest rates, inflation projection and the minutes from the Bank of England (estimates: 0.25%; no changes).
• 13.30: Mark Carney’s press conference.
• 14.30: Weekly jobless claims from the USA (estimates: 245k).

Increasingly hawkish Rosengren

Yesterday, we took note that the message from some members of the Federal Reserve was fairly hawkish. One of these members was Eric Rosengren, who emphasized the risks related to the real estates market. Yesterday, he made a new testimony in which he mainly focused on the monetary policy.

Rosengren’s message has been generally hawkish. He mainly emphasized an increasing risk of the overheating economy due to the fact that the unemployment rate is below the balance level. The economy will most likely grow beyond its potential and inflation has been near its goal. Rosengren also made suggestions regarding the necessary action within the monetary policy.

He claimed that, “it would still be reasonable to have three rate increases over the remainder of this year.” Rosengren also said that, “Looking ahead, the federal funds rate would obviously exceed 1 percent after one more 25 basis-point increase. In my view, that seems an appropriate point to consider beginning a very gradual normalization of the Federal Reserve’s balance sheet.”

The statement regarding the amount of rate hikes and the suggestion of the Fed’s balance reduction can be interpreted as hawkish. In addition, the date of announcing these suggestions doesn’t seem coincidental. Next month, the Fed will make a decision regarding interest rates and present new macroeconomic projections. Even though we shouldn’t expect a more rapid monetary tightening this year, four rate increases in 2018 are becoming increasingly likely. This would be a positive signal for the American currency.

Weak data from the United Kingdom

Even though today’s data from the British economy won’t impact the Bank of England’s announcement nor inflation forecasts, it has become a negative background for Mark Carney’s press conference. Industrial production increased 1.4% YOY, which was by 0.6 percentage points below the consensus.

The data regarding the UK foreign trade for March is even worse. This index quoted a deficit at the level of 13.4 billion pounds, which was its third worst result in history. In spite of a surplus in the services sector, the entire trade index didn’t look positive in March and quoted approximately 5 billion pounds deficit. This goes to show that the pound’s strong wear-off is not sufficient to reduce the external imbalance of the United Kingdom.

The Bank of England’s meeting will most likely not result in any clear changes. It’s possible that the inflation path will not be as steep as it was in the previous forecasts, because the pound has worked-off a portion of its losses and pressure on higher raw material prices has reduced. The economic growth perspective for 2017 may decrease due to its weak result from the first quarter.

It seems unlikely that anybody except Kristin Forbes would vote in favor of raising interest rates. Lower inflation pressure, uncertainty regarding the negotiation process with Brussels and early elections to the House of Commons discourage from abandoning the mild monetary policy too rapidly. Therefore, the pound may be weaker in the afternoon.

Franc at its new minimum

This morning, the EUR/PLN was quoted near the 4.21 level. However, the CHF/PLN tested the area of 3.83, which was its lowest level since September 2015. Moreover, the franc was just 0.03 PLN away from its level from before the SNB unpegged the CHF exchange rate (January 2015).

The situation of the zloty continues to be positive. The growth perspectives for both the eurozone and Poland seem fairly positive. This will most likely sustain a positive sentiment towards the zloty. The only danger for the PLN, for the time being, is more rapid tightening in the USA. However, the market will most likely not receive enough information to evaluate this, until the Fed’s meeting in June. Therefore, the EUR/PLN is estimated to remain near its current level.