The US currency strengthened significantly after the Federal Reserve’s statement However, it has slowly been creeping back to the level it was at before the statement and is worse than expected inflation. The zloty visibly lost value due to the dollar’s appreciation, but could come back to previous levels relatively quickly.
Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information unless marked otherwise.
- 2 p.m.: University of Michigan Consumer sentiment index (estimate: 97.1 pts, previous: 97.1 pts).
The dollar was the strongest since end of May
The Federal Reserve (Fed) increased as expected. The interest rate by 25bp to 1.25% which was the second rate hike this year. The Fed’s monetary committee (FOMC) maintained its view on the strengthening labour market and moderate economic growth. During the press conference Janet Yellen, Fed’s president, suggested that the labour market situation will support rising inflation and inflation readings that are susceptible to noise (referring to the worse than expected recent inflation data).
The Fed also put forward a plan to reduce its balance, including the reduction of principal payment reinvestments. Also, the median of the FOMC members still point toward three rate hikes in 2017. The dollar reacted positively to Wednesday evening’s information from the Fed – the dollar index (DX) rose to the highest level since the end of May. The reaction was quite sharp as the earlier inflation reading missed expectations (core index was the lowest in two years) and caused a sell-off of the US currency.
The Fed’s expectations regarding inflation returning to 2% in the medium term, as well as somewhat marginalising single inflation readings as noise, caused EUR/USD to go down from 1.129 to 1.113 during yesterday evening. Today, however, the US currency was slightly weaker and the relation of the euro to the dollar increased to 1.118. After Wednesday’s statement and Yellen’s press conference, investors will probably focus on inflation readings and labour market reports with particular attention. Should they continue to disappoint and not show improvement, the dollar could lose value.
There are no major events or publication planned for today which could markedly influence the currencies. At 4 pm, The University of Michigan will publish its consumer sentiment index. Growth has halted in recent months in this index and oscillated around 97 points. The median market expectation points toward a reading of 97.1 pts. The impact of this index on the dollar will probably be limited, however, should it significantly deviate from the market consensus, the US currency could see increased volatility.
Zloty’s weaker condition
The statement from the Fed and the strengthening of the dollar that happened afterwards, together in rising US Treasury yields, brought about zloty’s depreciation. The biggest reaction, though, came a day after (on Thursday) – in the afternoon USD/PLN rose to 3.80 and EUR/PLN to 4.24. A slightly worse sentiment on the European markets could have also caused the zloty to lose value quickly.
However, the chances for the zloty to further depreciate are fairly limited. This mostly depends on the dollar and whether it will continue strengthening. The probability for this to happen isn’t large. Despite Fed reassurance regarding inflation reaching 2% in the medium term and improvement in the labour market, inflation readings so far have been disappointing and labour market data hasn’t been that good either (relatively low average wage growth and low participation level, among others). Hence, the next months will be crucial with regards to inflation and labour market reports and could strongly impact both the dollar and zloty.
The zloty was regaining some strength lost on Thursday, which could also be due to lower liquidity on that day (holiday in Poland). Today, the dollar, in relation to the zloty, dropped to 3.77 and the euro dropped to 4.217. Taking into account that EUR/USD has been closing in on pre-inflation readings and pre-Fed statement levels, zloty could also come back to 3.74 – 3.75 in the case of its relation to the US currency (USD/PLN) and 4.19 – 4.20 in the case of the euro (EUR/PLN).