Daily analysis 15.03.2016

Investors are preparing for the Federal Reserve meeting on Wednesday. The first phone survey, which indicates an advantage of the Brexit supporters. The zloty remains stable against the main currencies. However, a deterioration of global sentiments can cause an increase in the EUR/PLN to the area of 4.30.

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

• 13.30: The American retail sales from February (estimations: excluding fuels and cars, positive 0.2%).
• 14.00: Level of inflation from Poland from February (estimations: negative 0.7% y/y).

One look at the Fed

After the emotions related to the European Central Bank (ECB) meeting last week, investors are preparing for the next decision from the Federal Reserve. As every quarter, the Fed's announcement will be enriched by new macroeconomic projections, median of the FOMC members expectations regarding the path of future interest rates, and Janet Yellen's press conference.

First of all, we need to take note that macroeconomic data from the period of upcoming and the previous Fed meetings, are relatively good. In February, the American economy created 242k new workplaces, and unemployment benefits are near their many-year minimum. Additionally, recent inflation reports should also support a more hawkish approach of the FOMC. The PCE base inflation increased to the level of 1.7% y/y, which is its highest for three years. Currently it exceeds the level, which was planned at the end of the year in the Fed's December projections.

Also, the market of term interest rates is also more convinced to hikes in the first half of this year. Currently, the chances for this are estimated at the level of 52% in June. The chances to see a bigger monetary tightening in the USA by the end of the year, are also increasing. The likelihood for at least two hikes is now 39.4%, and for at least three hikes – 11.1%.

Of course, the Federal Reserve focuses also on the foreign events, and considers the recent market events. Thus, a chance for a monetary tightening in March is small. However, the Fed may use this meeting to build up expectations regarding the June term as the base case scenario.

First of all, the FOMC may reach it by announcing three hikes in the median of expectations of particular members of the Fed. This would answer the question, are Janet Yellen and her associates that determined to strive for a visible increase in cost of money this year?

The second element, which may be hawkish and cause appreciation pressure on the dollar, is a change in description of the future economic condition. In October 2015, at the meeting before the hikes, the Fed wrote that the risk for the economy is almost balanced. On the other hand, in December it was balanced. In January, The FOMC claimed that it is carefully monitoring the events in the global economy and the financial market, and also evaluates their impact of the labor market, inflation, and risk balance for the prognoses.” This was a clear signal of leaving the “balanced”, and “almost balanced” risk.

However, if the Fed returns to one of these options (probably “almost balanced”), we could assume that the majority of the observed risks for the FOMC decreased, and the Committee begins to return to the base case scenario. This should be a positive sign for the dollar.

The press conference of Janet Yellen may also be important. If she emphasizes particular elements impacting the monetary policy, this will give either “a dovish message” (the one doubting in keeping the scenario of three hikes this year), or relatively dovish (the one sustaining the perspective of an increase in interest rates by 75 base case points during three forthcoming quarters).

If the hawkish scenario fulfills, it should translate to a further increase in inflation expectations, perhaps even in the form of higher profitability of treasury bonds. This should also be a positive sign for the American dollar.

Renewal of the pound's problems

Since morning we can observe a visible wear-off of the pound. The European currency loses approximately 1% to the euro. A similar move is observed also against the zloty. The main reason for a decrease in value of the GBP, is a phone survey conducted by The Telegraph and the ORB. It indicates that 49% of the respondents supports the Brexit, and 47% is against it.

Theoretically, this information should not cause such a change. For weeks the average of results of the recent surveys showed that the amount of supporters and opponents of the Brexit is practically equal. However, it is worth noting that the majority of surveys published in the United Kingdom, is conducted online, and it was mainly this type of surveys which indicated a draw.

On the other hand, the phone surveys show that the supporters of remaining in the European Union had a clear advantage, between 8 and 19 percent. Thus, The Telegraph survey is the first phone survey, which shows that the majority of respondents is for the Brexit.

If the next surveys show a decreasing number of supporters of remaining in the EU, the GBP/USD may return below 1.40, despite a recent wear off of the dollar. On the other hand, the pound expressed in the zloty, may go below 5.40, which is its lowest level since December 2014.

Stabilization

The national currency is relatively stable after a recent, relatively hawkish meeting of the MPC. The Euro remains below the limit of 4.30 PLN, and the dollar is near 3.85 PLN. Currently, a slight deterioration of the global sentiment does not have a negative impact on the national currency. If, however, if there is a significant overvalue in the developed capital markets (S&P 500 below 2 thousand points), we can expect the EUR/PLN to return to the area of 4.30.

On the other hand, the forthcoming macroeconomic publications should not have a big impact on the zloty's behavior. This concerns also today's data about inflation. Considering the MPC press conference on Friday, we should not expect that the Council decides to cut interest rates, even it the CPI remains below zero. Thus, the euro should be evaluated below 4.30 in the scenario of neutral internal events.