Daily analysis 18.08.2016

The dollar became weaker after publication of minutes from the Federal Reserve meeting in July. Positive retail sales data may allow the pound to work-off some of the Brexit related losses. The zloty is slightly gaining against the main currencies. The pound is increasingly closer to the 5.00 level.

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

• 14.00: Industrial production from Poland for July (estimations: positive 0.9% y/y).
• 14.00: Retail sales from Poland for July (estimations: positive 3.4%).
• 14.30: Weekly jobless claims from the USA (estimations: 265k).
• 16.00: William Dudley's testimony.
• 22.00: John Williams' testimony.

Fed is not in a hurry

Yesterday, we could expect the Federal Reserve message to be more hawkish than previously. After all, two matters that was an obstacle for the Fed in suggesting a more definite rate hike have became clear to a significant degree. The market has stabilized quite quickly after the British referendum. Moreover, the amount of new workplaces in non-agricultural sector returned to the previous trend.

Both of these elements were actually included in the Fed's message. They could even contribute to the fact that the dollar initially began gaining value. An unambiguous reaction of investors shortly after 20.00 (8 PM) was also caused by a wide discussion between the American central bankers regarding the future inflation, USA's economic activity and external situation.

There was one conclusion from this chaotic debate. Those representatives of the Fed who have the right to vote regarding interest rates (10 members) are clearly more dovish towards the monetary policy than the rest of the members (17) who participate in the discussion.

As a result, the following sentence is the most important fragment of the minutes: “the members (who have the right to vote – author's footnote) have generally agreed that before making another step towards monetary tightening, it will be reasonable to gather more data in order to evaluate the labor market condition, as well as the economic activity.” This main view can be compared to more extreme opinions from the members who have the right to vote.

“Two of the FOMC representatives would like to wait for more evidence that inflation will increase to 2%.” This may be interpreted as slightly more dovish. On the other hand, “some representatives (probably three representatives – author's footnote) expect the estimated economic condition to justify making the decision of a decrease in accommodative monetary policy soon.”

As a result, the probability of raising interest rates on the meeting in September, as well as in November, remains relatively small. It would have been much larger, if the latter quote was supported by the majority of voting members. However, this did not happen. Therefore, the nearest real date for the monetary tightening in the USA is December, but only if the macroeconomic data is relatively positive and the worldwide economy development is close to consensus of the main analytical institutions.

Yesterday's message of the Fed was negative for the dollar. The EUR/USD pair returned above 1.1300. We sustain our scenario that the American currency would remain relatively weak during the forthcoming weeks and has a chance for a clearer strengthening not sooner than in the fourth quarter. This strengthening (just like the Fed's monetary tightening) is determined by an improvement in the GDP readings, sustaining a positive labor market condition and a stable level of base case inflation.

Positive surprise in United Kingdom

At the end of the last week we took note that the retail sales data may be an element that would allow the pound to work-off some of its latest losses, at least in the short term. However, the consumers demand appeared to be much better than the consensus.

Sales increased by 5.9% y/y, against the 4.2% y/y estimations. This optimism is slightly lower due to a statement from chief economic adviser of the British Office of National Statistics (ONS). Joe Grice was cited by Bloomberg Agency and said that, “a better weather this year was probably the main element that caused sales of clothes and shoes to behave very positively.” He also took note that due to a wear-off of the pound, the foreign guests were spending more money. For example, the sale of watches, as well as of jewelery increased by more than 16% in y/y relation.

In general, the readings from the United Kingdom (along with yesterday's publications from the labor market) do not suggest a significant economic slowdown in the country. They are also not an argument for a further monetary easing. Thus, the forthcoming weeks may allow the pound to work-off a part of its losses and cause the GBP/PLN to return above the 5.00 level. However, perspectives for the pound remain negative in the long-term. It is most likely that we will see an increase in the most recent minimum of the pound against the dollar, as well as the zloty by the end of this year.

Zloty benefits from a better sentiment

The return of a weaker dollar, as well as growths in the American stock markets, are causing the EUR/PLN to return to the 4.28 area and the USD/PLN to go below 3.80. Theoretically, these values may be disturbed by the readings of retail sales and industrial production today.

However, the data would have to be significantly different than the consensus or than the latest trends, in order to cause stronger moves on the PLN. Thus, we don't expect the general evaluation of the zloty to change by the end of this week. We can only expect that some of the global players may begin to reduce the positions set for a depreciation of the pound. This would increase the chance of the GBP/PLN to return above the 5.00 level.