Daily analysis 13.10.2017

A series of speeches by Fed members. The ECB without any major influence on quotations. Will the ECB reduce the asset purchase program by half from that of the new year? Important data from the US for the dollar. The zloty benefits from positive sentiment toward emerging markets. In the morning, the EUR/PLN pair tested the area near 4.26.

Key macro data (CET time - Central European). Estimates of macro data are based on Bloomberg data unless otherwise noted.

• 2.00 p.m.: September data on core inflation in Poland (estimates: 0.1% MOM and 0.9% YOY),
• 2.30 p.m.: September retail sales in the US (estimates: +1.7% MOM excluding fuels and cars: +0.4% MOM),
• 2.30 p.m.: September consumer inflation CPI in the US (estimates: 0.6% MOM and 2.3% YOY, excluding fuels and food 2.0% MOM and 1.8% YOY),
• 4.00 p.m.: Consumer sentiment index from University of Michigan (estimate: 95pts).

Will ECB reduce the QE by half?

Over the past hours, many speeches have been given regarding the market by both Federal Reserve and European Central Bank representatives. However, they do not clearly change monetary perspectives for the eurozone or the US.

Lael Brainard, a member of the Fed's Board of Governors, referred to the subject of recent low inflation readings but it could not be concluded from her comments whether most of the recent changes in consumer prices were temporary or long-lasting. Jerome Powell, also a Board of Governors' representative, tried to assess the normalisation of the US monetary policy’s impact on the behaviour of the emerging markets. According to Powell, this impact should not be particularly strong. He did not refer to the normalisation of the monetary policy pace in the US.

Raphael Bostic, the recently appointed President of Federal Reserve Bank of Atlanta (voting rights in 2018) also published the speech. It seems that Bostic is rather close to the Fed's consensus. In addition to official publications, FOMC members took part in media interviews. Eric Rosengren has maintained his opinion of 3 rate hikes next year, which is also in line with his overall monetary policy approach. In turn, in an interview for Reuters, Bullard has defended his well-known statement on the necessity to wait for the moment when inflation reaches 2% before the Fed decides to introduce further rate hikes. In general, therefore, the large number of messages did not translate into being surprising.

The ECB released speeches from Mario Draghi and chief economist Peter Praet. Draghi's comments sent the message that the theoretically important fragment was regarding the maintenance of low interest rates long beyond the period of QE tapering. However, this information has already been repeated several times during the press conferences following the ECB meeting. Preat, on the other hand, drew attention to the good economic situation, however still very limited, inflationary pressure. No suggestions on the pace of QE tapering have been made.

The most interesting information on the monetary policy was probably unofficial reports from Bloomberg that the ECB could announce a reduction in the quantitative easing in October by half from January 2018. A lower asset purchase program would take another 9 months. This seems to be relatively hawkish information, as the QE reduction was expected to be smaller at the beginning. In addition, presenting this in October (and not at the end of the year) reduces the risk of withdrawal from these plans. On the other hand, however, this is not information that should evoke a strong euro appreciation. Rather, it is a message that only supports relatively good sentiment towards the single area currency.

Impulses from data. The stronger zloty

Data from the US is worth noting this afternoon. The market's reaction will show whether the sentiment towards the dollar could still be negative or whether there is a chance to change it. In reports from 2.30 p.m., the most important will be core CPI inflation, which is only slightly correlated with commodities prices or hurricanes. The Bloomberg economists’ consensus is between 1.7-1.8% (median of 1.8%). Yesterday's core production inflation was 0.2 percentage points above estimates (2.2 %). Reaction to a hypothetical, higher than expected reading could answer the question if the dollar needs very strong impulses (e.g. from the Fed) or whether an already higher CPI level may reverse the current downward trend.

The US data should also be important for the zloty. In the morning, the EUR/PLN pair was valued near the 4.26 boundary, and the franc moved close to 3.70. Higher than expected core inflation in the US could weaken currencies in the region, especially as they have been recently appreciating at the expense of the US dollar. In the dollar's case, hypothetical upward movement could even reach 3-4 gr.

There is also a relatively high probability that core inflation in Poland has breached the economists' estimates (0.9% YOY) in September and has reached 1.0% YOY. This was the highest reading in almost 3 years. Perhaps the core inflation value alone is not impressive, but its further increases in subsequent months could increase discussions regarding rate hikes in Poland. This is a positive signal for the zloty, although its impact on the Polish currency's valuation may be limited.