Daily analysis 21.09.2017

The hawkish statement from the Federal Reserve has significantly strengthened the dollar. SNB's comments and new economic projections put additional pressure on the franc. The zloty loses after the Federal Reserve meeting. The EUR/PLN pair close to the 4.29 boundary and the USD/PLN pair is testing the 3.60 level.

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

• 2.00 p.m.: "Minutes" from September's MPC meeting,
• 2.30 p.m.: Weekly initial jobless claims from the US (estimates: 302k),
• 3.15 p.m.: Speech by Mario Draghi, President of the European Central Bank.

Hawkish statement from Fed strengthens the dollar

Yesterday, the main currency pair reacted very clearly to a more hawkish than consensus statement from the Federal Reserve. The EUR/USD pair has dropped from approx. 1.2000 level to 1.1862. During the first hours of the European session, trade is close to the 1.19 boundary. What is important, the movement on currencies was supported by changes in debt instruments.

The yields on 2-year treasury bonds increased by 6 basis points and reached the highest levels since 2008, close to the 1,45% boundary. A similar scale of growth was observed in instruments maturing in 5 or 10 years' time. The interest rate market is currently valuing December's chances of increase by 0.25 percentage points, by over 60%. Before the meeting, this probability was only slightly above 50%.

The main element that led to a strong reshuffle on the bond and currency market was the fact that the median of future interest rates remained at June's levels. The Fed still expects a monetary tightening of 1 percentage point till the end of 2018. For a few good days, we have been pointing out that such a scenario is the most likely scenario, and it may cause the US currency appreciation, as part of the market is focused on reducing these expectations by the Fed.

The Federal Reserve, in line with expectations, has also decided to reduce the Federal Reserve's balance sheet by 10 billion USD per month since October. Every quarter this value is to be increased by another 10 billion until it reaches the 50 billion limit. This is hawkish news, but it has been repeatedly suggested by FOMC members and its impact on the dollar is probably marginal.

Some dovish elements could also be found in the FOMC macroeconomic projections. Yesterday, however, we pointed out that even if the target interest rate was to be lowered, it is still likely that this perspective is too distant (after 2020) to have a negative impact on the dollar. This is also how the market interpreted this decision.

There were a few dovish elements in the press conference. The chief of the Fed seemed to support the projected monetary tightening path and the recent low inflationary pressure (although difficult to explain) does not hamper the tightening of the monetary policy. In general, therefore, the market response appears to be justified in the context of the overall statement from the Federal Reserve.

Another lesson can be drawn from yesterday's meeting. The bar to a noticeable limitation of future interest rate increases is quite high and even "scrubbing" the core inflation close to long-term lows does not encourage the Fed to change its attitude. This can support the dollar in the coming weeks and significantly reduce the chances of the US dollar to reach new lows.

New records of the franc's weakness against the euro

Before midday, the EUR/CHF tested 1.1580 levels. These are the euro's highest levels against the franc since the second half of January 2015. The movement upwards on this pair is due to the general weakness of the franc. In the morning, the State Secretariat for Economic Affairs (SECO) published macroeconomic forecasts which suggest that the economy will only grow by 0.9% in 2017. In turn, the inflation next year will only be 0.2%.

An interview with Thomas Jordan in Luzerner Zeitung could also have a negative impact on the franc. The President of SNB stated that negative interest rates are not sufficient and those currency interventions are still needed. Jordan also estimates that interest rates in Switzerland should be lower than those in the eurozone, otherwise it attracts too much of the Swiss capital.

Weaker zloty. The franc is testing 3.70 PLN

The Federal Reserve statement caused the zloty's weakening. The dollar increased by approx. 6 groszy, breaching the 3.60 boundary. The EUR/PLN is higher by approx. 1.5 gr comparing the quotations before the Fed's statement. The strong franc's weakening on the global market causes that the CHF/PLN remains close to the 3.70 boundary, and less than a percentage for the Swiss currency in relation to Poland was priced at the lowest levels since the second half of January 2015.

The afternoon is not particularly rich in macroeconomic data. Some attention may be drawn to the minutes publication from the September's meeting of the Monetary Policy Council. It will be interesting whether there will be any dovish suggestions in it, as it was the case of the last statements of some members of the Polish MPC. In general, however, it is likely that the PLN trading in the following hours should not differ much from what we witness in midday.