Daily analysis 19.05.2016

It is possible that the Federal Reserve will raise interest rates in June. The dollar is at its highest level against the euro since the end of March. The zloty remains at a low level. A strong consolidation of the pound against the zloty.

The protocol from the FOMC meeting was hawkish. The report directly indicates that June is the most likely time for an increase in interest rates. The decision of the American monetary authorities will be determined by the development of the economic situation. The main factors of this development are the situation within the labor market, as well as the return of inflation to the FOMC target of 2%. However, the publication also shows that not every member of the Committee is fully convinced about the arguments for the hikes in June. This is why it has been decided to remain flexible concerning this matter.

However, the tone of the announcement was sufficient enough for a strong consolidation of the dollar against the euro. For a moment, the exchange rate of the main currency pair was at the lowest level since the end of March. Even though the EUR/USD worked-off these losses on Thursday morning, this movement was rather a correction of yesterday's depreciation.

The probability of the hikes in June, based on the terminal contracts market, had also clearly increased. Currently, it is at the 30% level, while only yesterday it was clearly below 20%. Moreover, the probability of hikes in July is 50%, and it is clearly above this level for the following months. This change is significant, because not long ago, the terminal contracts market suggested only one hike for the entirety of 2016.

The FOMC minutes coincided the recently presented views of the Federal Reserve representatives. During the past few days, Dennis Lockhart and John Williams spoke of at least two hikes this year. The comments from these two Fed representatives, were one of the factors leading to the strengthening of the dollar.

Moreover, the macroeconomic data from the past few days was relatively positive. The industrial production surprised positively, and it suggested an acceleration after very negative data from the first quarter of 2016. The inflation report was also better than expected. The data regarding changes in employment on the other hand, was a strong disappointment. However, the comments from the Fed members suggest that the recent slowdown does not exclude the scenario of the monetary tightening.

Zloty at a low level

The optimism caused by a favorable decision from Moody's (reduction of the perspective to negative, without a downgrade of the rating) has been basically used up. At the beginning of the current week, we received a relatively negative opinion regarding the situation in Poland from the International Monetary Fund. Moreover, the Fitch agency (it will present the revision of Poland's rating on July 15th) published a critical report yesterday.

Fitch emphasized the significance of the economic data. Poland clearly slowed down in the first quarter (3% against 4.3% in the previous quarter). This caused the agency to downgrade its forecast for this year from 3.5% to 3.2%. On the other hand, the governments expect a growth level of 3.8%. This situation is causing an increase in the risk of keeping the deficit below the level of 3%, especially next year.

Thus, the significance of the Polish economic data is growing. If today's publication regarding the industrial production, as well as retail sales, appears disappointing, we can expect an intensified unfavorable pressure on the zloty.

Recently, the Polish currency has returned to depreciation. The broad weakness of the zloty, as well as the observed strengthening of the pound, has caused the GBP/PLN exchange rate to increase. Today, it reached the level of 5.74 PLN. This is its highest level since the beginning of February. Considering the dominating tendencies in the zloty market, there is a rather limited chance for the Polish currency to strengthen.