Daily analysis 17.09.2015

The Fed's meeting – probabilities of different scenarios. How the market is going to react in the evening? The SNB keeps monetary policy unchanged. Polish currency is depended on the Fed. Publication of industrial production and retail sales.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 14.00: Industrial production from Poland (survey: +6.4% y/y).
• 14.00: Retail sales from Poland (survey: +1.5% y/y).
• 14.30: Building permits from the US (survey: 1.159 million).
• 14.30: Housing starts in the US (survey: 1.160 million).
• 14.30: Weekly jobless claims from the US (survey: 275 tys.).
• 20.00: The FOMC publishes interest rate decision (survey: unchanged at 0.00-0.25%).
• 20.30: Janet Yellen press conference after the FOMC decision.

The base case scenario

Today's Fed's publication seems to be the most discussed decision in the history of the US monetary policy. The real perspective of the first, since almost 10 years, rate hike significantly divided market but it does not rule out that we can build at least four scenarios – the base one and three alternative.

Taking into account both global and domestic data the highest probability is that the rates will remain at the current level and the Fed is going to be as neutral as possible in its communication. The Committee is expected to lower the future interest rate path and probably will suggest one hike this year, three next year, and four in 2017. Summarizing investors should expect 200 bps hike in next nine quarters. It is a significant difference especially that in June the Fed's median future rate suggested 275 bps till the end of 2017.

Theoretically a positive impact for the dollar may come from lower unemployment projections. However it is possible that the Fed will also lower the neutral rate of unemployment. As a result the amount of labour slack in the economy can remain at current level and it fails to support the dollar.

Moreover it is possible that the Fed decides to lower inflation rate – both core and headline. It would support the view that higher dollar and lower commodities prices can translate to the core inflation. It is dollar negative despite that it is included in the base case scenario.

Beside the rate decision and macroeconomic projections the market is expected some hints from the statement and the conference. The latter elements may be dollar positive. The US economic description should be quite bullish especially taking into account solid GDP growth in Q2, lower unemployment and improvement in the housing market. Also Yellen's comments may be positive regarding the US future economic growth. Overall, however, the final base case scenario message is expected to be dollar negative and should push the EUR/USD beyond 1.1400 level.

Alternative scenarios

The dovish alternative scenario assumes keeping the benchmark unchanged but gives even more depressed future interest rate path – less than 200 bps increase until the end of 2017. It also supports the view that the core inflation will be lowered by more than 0.1 percentage point for the following year. Both issues are expected to be dollar negative and push the EUR/USD even toward 1.15.

The hawkish alternative scenario assumes interest rate hike. It would be, however, combined with many elements of the base case – reduction of the future interest rate path but with no less than 225 bps and probably lower headline inflation. Overall this scenario should be dollar bullish and could even push the EUR/USD toward 1.11. Only some dovish comments from Yellen could limit such strong slide. In our opinion the probability for base case scenario is 50% and for two alternative ones is 20%.

There is also 10% chance that the FED keeps interest rate unchanged but will still expect around 250 bps hikes in two following years and fails to lower the 2016 inflation. It would finally probably push the dollar higher but the market would have hard time to fin the equilibrium.

No changes from the SNB

The SNB, in line with expectations, kept its monetary policy unchanged. It noted some franc weakness but the MPC still claims that the local currency is “significantly overvalued”. The SNB wants to keep negative interest rates in the “foreseeable future” and be present on the FX market.

Overall the message from Zurich is in line with our expectations of further gradual depreciation of the Swiss frank, which is expected to have a similar path to that observed in the recent months. Long period of stable EUR/CHF trading and then some weakness but without a certain impulse.

The foreign market in a few sentences

Taking into account the most recent events today's Fed's meeting will be probably regarded as dovish. It should also put pressure on the dollar and push the EUR/USD toward 1.14. However, if the Fed decides to hike the benchmark then the most heavily traded currency pair may even drop toward 1.11.

The zloty should benefit from the Fed's decision

Today's retail sales and industrial production data are expected to be ignored by market participants. Investors are expect to wait for the Fed's meeting results. In the base case scenario the message from the Fed should be positive for the PLN and for other EM currencies.

If the base case scenario turns out to be true the EUR/PLN may fall to around 4.18 while the USD/PLN can drop toward 3.66. If the most dovish view is implemented by the Fed's officials then the EUR/PLN can even slide toward 4.16 and the USD/PLN may drop toward 3.62. In the case of Fed's interest rate hike the EUR/PLN can be pushed toward 4.22 and the dollar may soar toward 3.78-3.80.

Anticipated levels of PLN according to the EUR/USD rate:

Anticipated GBP/PLN levels according to the GBP/USD rate: