Daily analysis 18.12.2013

The summary of all options which may be considered by the Fed's officials and its hypothetical impact on the market. Another step toward the Banking Union. The zloty will be slightly affected by the Fed's decision. No impact on the PLN is expected from industrial production reading.

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

• Besides the market consensus we are also publishing the consensus range. It gives more info how economists predict the incoming data and what kind of impact can be generated from surprising reports.
• 10.00 CET: Already published German Ifo reading which was in line with the market expectations at 109.5 (previously 109.3). No impact on the market is expected.
• 14.00 CET: Industrial production from Poland (survey: +1.2% y/y according to the ISBnews surey; range between 0.0% to 3.8%.
• 20.00 CET: Federal Reserve statement (QE/forward guidance decision) and the Fed's economic projections.
• 20.30 CET: Ben Bernanke press conference after the FOMC meeting.

FEd's scenarios. The Banking Union

In line with expectations the currency pairs with US dollars are waiting for the Federal Reserve decision. As a result the EUR/USD remains fairly stable around 1.3750. Much more volatility is expected around 20.00 CET when the Fed's statement is released.

After a surprising September Federal Reserve decision on keeping the QE at the full mode, the current expectations are pretty scattered. The market is evenly divided between the opinion that the Federal Reserve starts the tapering today or at the beginning of 2013. Therefore I would like to summarize all the possible scenarios for the Federal Reserve and evaluate the probability of each outcome.

1. Ben Bernanke and his colleagues leave the asset purchase at the current level and suggest that the FOMC waits for further economic improvement until it decides to start stalling back the asset purchase operation. It would be really dovish message to the markets which should keep a downward pressure on the dollar, push the yields on Treasuries lower and strengthen the EM currencies (including the Polish zloty). The probability of such result is around 20%.

2. The Fed leaves the QE at unchanged level, but clearly suggests that due to to improving economic conditions the taper will be announced at the incoming meetings. The probability is around 25%.

3. Slight taper (around 5-10 billion) is introduced. Additionally the forward guidance is modified and the Federal Reserve announces that the unemployment threshold in its forward guidance is lowered to 6% or even lower. It also introduces the interest rate floor claiming that the interest rates will not be risen until the PCE inflation increases above 1.5%. The probability of such development is around 15% and the market reaction will be firstly negative for the stocks or EM currencies, but later it should keep the dollar low and give some boost to the zloty or the EUR/USD.

4. The Fed decides to cut the asset purchase program by 5-10 billion but does not change the forward guidance. It only repeats a well known phrase that tapering is not tightening monetary conditions and the asset purchase will be set at each meeting. The message is bullish for the dollar and overall increases the risk aversion. The probability of such scenario is around 30%.

5. The remaining 10% is left for any mix of the mentioned above scenarios.

Summarizing the expectations for asset purchase reduction are evenly divided between today's date and the two next meetings. If the tapering starts this evening, the key will be any modification of the forward guidance or the dovishness of the Federal Reserve chairman. On the other hand if the FOMC decides to keep the QE at full scale than the similar discussion will be proceeded in January. Today the Fed will also announce its economic estimates for 2014 and beyond. According to the recent macro reports the inflation and unemployment should be revised downward and the GDP growth upward (rather positive for the dollar).

The zloty should remain fairly stable

The global currency market will be quite volatile during the evening hours. We are also expecting more nervousness on the zloty, but the EUR/PLN should not exceed its 4.16-4.20 range no matter what the scenario is announced. In case of tapering we can move toward 4.20, and if the Federal Reserve leaves the QE unchanged we should slide toward 4.16. The industrial production reading from Poland should have no impact on the zloty, especially that a few hours later we are having the results of Fed's meeting.

Summarizing the zloty will be more volatile after 20.00 CET, but no trend changes are expected. We should end the current week within the 4.16-4.20 range.

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

Expected GBP/PLN levels according to the GBP/PLN rate: