Daily analysis 17.12.2015

The Fed is slightly more hawkish than expected. What may speed up or slow down the interest rate hike? Bloomberg publishes unofficial list of candidates for the Polish MPC. Industrial production and retail sales from Poland.

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

• 14.00: Industrial production from Poland (survey: 5.7% y/y).
• 14.00: Retail sales from Poland (survey: +2.2% y/y).
• 14.00: Minutes from December Polish MPC meeting.
• 14.30: Weekly jobless claims from the US (survey:+275k).

Slightly hawkish message from the Fed

In line with expectations the Federal Reserve hiked the interest rate yesterday. The decision was very well communicated so the volatility was limited on all major markets. However, there are several elements which are worth noting. They may help to identify future signals which can either strengthen or weaken the US currency.

Firstly the rate of future interest rate path presented in the macroeconomic projections is higher than expected. Currently the median FOMC rate at the end of 2016 is around 1.4% which accounts for 4 hikes in 2016. With low inflation and strong dollar, and weak export it was expected that the Fed would reduce the amount of hikes from 4 to 3 for 2016.

In this hawkish signal there is, however, the dovish element. Currently the expectations above median are presented only by 3 FOMC officials while in September 8 out of 17 were anticipating a higher then median pace. It may suggested that if there is a small deterioration of the US macroeconomic readings some officials, who are at median now, would push their expectations lower which also brings the whole consensus lower.

The second element which might be regarded as hawkish is a fact that all voting FOMC officials agreed on the hike. Earlier there were speculations that at least Charles Evans, Chicago Fed's president, would be against the hike. It was also possible that governors Brainard and Tarullo might also dissent. It would mean a strong dovish opposition in the Fed's core. It wasn't the case this time so it should be regarded as quite hawkish.

On the other hand there were also some dovish comments. Janet Yellen repeated many times that the pace of hikes would gradual and the cycle is not a preset course. An important element is also included in the statement. To determine the future hikes the Fed will “carefully monitor actual and expected progress toward its inflation goal”

More emphasis on actual inflation may cause that the current data in determining future moves should increase attention to single macroeconomic reports especially that regarding consumer prices or employment. If the readings turn out to be weaker it may push back the second hike toward June. This would be a strong argument to generate a dollar weakness.

On the other hand if the payrolls data remains solid and the core PCE inflation is pushed toward Fed's consensus for 2016 (+1.6% y/y) then the Fed would be able to fulfill its base case scenario presented yesterday. It might keep the dollar strong and bring the EUR/USD valuation even lower.

As a result the dollar reaction may be volatile especially that there is a half hour gap between the statement and press conference from Janet Yellen.

The foreign market in few sentences

The FOMC decision announced yesterday should boost the US currency. This tendency may be, however, quickly disturbed if the US data turn to be weaker than expected. Further, in a scenario of lower inflation and slower job gains the would generate a significant uncertainty regarding the March decision. It could be a good argument for the dollar to weaken.

Rumors on the new MPC members

On Wednesday Bloomberg published unofficial list of candidates for MPC citing “people, who asked to remain unidentified to discuss private conversations”. Professors Zyzynski and Ancyparowicz are on the list. According to PAP interview Zyzynski said on December 9th that interest rates might by but at maximum 25 bps adding that it will not give any major effect.

On the other hand Ancyparowicz told Bloomberg that “further monetary easing will definitely limit bank's profitability and won't awaken the sluggish economy, while it can accelerate inflation”. Other candidates presented by Bloomberg – professors Iwanicz-Drozdowska, Alińska, Hockuba, Zaleska, Hardt, Chrzanowski, Wojtyła, Lon, and Ostrowska hasn't commented the monetary policy recently.

Readings from Poland – industrial production and retail sales – should be important for the zloty today. If they both meet expectations and the global sentiment remains solid it may push the EUR/PLN lower and increase the odds for finishing the week below 4.30. In the longer term the key message would be MPC composition. If it turns out that new members are not keen to lower the benchmark the zloty may regain some strength and the EUR/PLN could even slide below 4.25.

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

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