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Daily analysis 20.09.2017

20 Sept 2017 12:31|Marcin Lipka

A slightly weaker dollar before the Federal Reserve meeting. Is there a better chance of a relatively hawkish message than a dovish surprise? Clearly better data on retail sales supports the pound. The zloty maintains yesterday's increases. The EUR/PLN pair close to the 4.28 boundary, but the hawkish statement from the Fed can weaken the national currency.

The most important macro data (CET - Central European Time). Surveys of the macro data are based on information from Bloomberg unless noted otherwise.

  • 4.00 p.m.: Sales of new homes in the US (estimates: 5.45 million; growth of 0.2% MOM),
  • 8:00 p.m.: The Federal Reserve's decision on interest rates (estimates: no change in the range of 1.00-1.25%). Publication of the FOMC statement and macroeconomic forecasts,
  • 8.30 p.m.: Janet Yellen's press conference (The President of the Fed).

Fed's meeting in the spotlight

The EUR/USD has been near the 1.20 boundary in the past hours. However, it is noticeable that since the beginning of the week, there has been a slight depreciation of the dollar, which may suggest that an increasing number of market participants expect a relatively dovish statement from the Federal Reserve.

In order to perceive the FOMC's overall statement as dovish, the projections of future interest rates in macroeconomic forecasts should be reduced for the coming quarters. In June, the median of interest rate expectations assumed one more increase this year by 0.25 percentage points and three more in the next year (0.75 percentage points in total). However, the chance of a slower pace of monetary policy tightening than that presented in the middle of the year seems to be limited.

At least five of the sixteen FOMC members would need to revise their expectations for the median to assume that there will be no increases this year. An analogous number of the FOMC representatives would have to change their view on monetary tightening in order to reduce the perspective of rates for 2018 in order to reduce the prospect of rates for 2018. This major change is unlikely, even given the lower than expected inflation, quite slow wage growth or the effects of the recent hurricanes that hit the US.

However, the scenario of a slight reduction in the interest rate perspective for 2019 and the "target" level is more likely. In this case, only three members are missing in order for the median to decrease from 2.9% by 3.0% to 2.75% respectively. This would reflect the lower inflationary pressure, which indeed appears to be a long-term trend. On the other hand, however, this reduction should not result in additional downward pressure on the dollar. As a result, the chance of dovish surprise with the forecasts' publication is low, while failure to meet expectations for accommodative publication may strengthen the US currency just after their release.

A significant part of uncertainty may be the course of Janet Yellen's "opening speech" and a press conference. Much will depend on investors attitude and the issue of "catching up on" some information by them. References are appearing to the relatively low inflation or additional uncertainty about the impact of the hurricanes in the south of the US (negative to the dollar). As a result, even in the case of quite a hawkish signal of interest rate forecasts (no changes or slight modification, but only from 2019), the appreciation of the dollar may be limited. Overall, however, the chances of a stronger USD this evening are somewhat greater than the perspective of its sudden weakening.

Positive set of data from the UK

Retail readings from the UK may be considered as a big surprise. August's data showed the 2.8% YOY increase (excluding fuels) with the expectation of 1.4% YOY. Additionally, the figures for July were revised upward from 1.5% YOY to 1.7%. The GBP/USD pair rose by almost 100 pips (0.7%) just after the data was released. While a significant part of the morning's movement was limited, such a strong increase in consumption is an argument for monetary policy tightening in a relatively rapid manner (even in November) by the Bank of England.

However, a relatively rapid reduction in the pound's appreciation after the retail sales' data publication may be the result of waiting (part of uncertainty) for PM Theresa May's performance in Florence. Today, the Financial Times reported that on Friday, she can announce that the UK will pay EU contributions up to 2020 (approximately 20 billion EUR). If this scenario is confirmed, and the performance suggests the possibility of even expanding this deadline (transition period until 2022-2023), then the pound should clearly appreciate due to the decreasing and spread over time risks associated with Brexit.

Zloty maintains yesterday's increases

Significantly higher than expected readings of yesterday's industrial production from Poland combined with a good sentiment in the region (the forint appreciation despite the deposit rate's reduction by the central bank) and the lack of growth in the US yields on Treasury bonds (despite next record on the market) support the zloty. The EUR/PLN pair slightly below the 4.2700 boundary around midday.

Today's overall statement from the Federal Reserve may have quite a significant impact on the zloty. If the Fed turns out to be dovish (the median reduction of future interest rates for 2017 and 2018 - details in the previous paragraphs) then the EUR/PLN pair may head towards 4.25, and the USD/PLN pair may even test approx. 3.50 level. However, it is more likely that there will be no major changes in the Federal Reserve's interest rate projections. This can cause the dollar to approach the 3.60 boundary and the EUR/PLN to the last highs close to 4.30 level.


20 Sept 2017 12:31|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

19 Sept 2017 15:13

Afternoon analysis 20.09.2017

19 Sept 2017 12:30

Daily analysis 19.09.2017

18 Sept 2017 15:04

Afternoon analysis 18.09.2017

18 Sept 2017 12:44

Daily analysis 18.09.2017

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