Daily analysis 23.10.2017

Lower EUR/USD trading due to slight downward pressure on the euro and the relatively good dollar condition. S&P Global Ratings has left Poland's rating unchanged, but the overall tone of the message was negative. The EUR/PLN pair remained stable and close to the 4.23-4.24 boundary.

Key macro data (CET time - Central European). Estimates of macro data are based on Bloomberg data unless otherwise noted.

• No macro data that can clearly influence the analysed currency pairs.

EUR/USD under pressure

The first trading hours on the EUR/USD have been accompanied by slight drops of the main currency pair and tests close to 1.1750 boundary. Theoretically, the decline should not come as a surprise given the next demonstrations in favour of Catalonia's independence and the increasingly complex situation in Spain in general, which at some point may be a threat to the eurozone's stability as a whole.

However, investor's behaviour does not show the strong fear connected with Spain. Today, the yields of the Treasury bonds, maturing in 10 years, fell down by 3 core points and amounted to 1.63%. The worse EUR/USD condition is, therefore, not mainly related to concerns about the next steps of Madrid and is probably more dependent on speculation about the ECB's next steps and the situation in the US.

The ECB meeting is scheduled on Thursday. During the meeting, it is likely that a decision to halve the quantitative easing (from 60 billion to 30 billion EUR) from the new year for a period of 9 consecutive months will be announced. Such a turn of events should be neutral for the euro. However, there is a risk that this decision will not be taken on Thursday (negative for the euro) or the scale of the QE tapering restriction will be smaller than predicted. Moreover, it is also worth remembering the events in the US.

Last week, the Senate voted a budget that will allow the deficit to be increased by 1.5 trillion dollars over the next decade. It is likely that this decision will also be accepted by the House of Representatives. This will open the way to changes in the tax system, and, therefore, to a broadly debated fiscal stimulus. The growing expectations of a lower tax burden and at least a short-term acceleration of economic growth and inflation are visible in the debt instruments market. The yields of Treasury bonds maturing in 2 years reached 1.58% before midday, they tested 9-year highs. The yields Treasury securities maturing in 5 years are also growing and are recorded at the level of nearly 2.03%. There are around 10 basis points to reach the highest levels for more than 6 years.

The growing yields of US Treasury bonds support the perspective of further rate hikes by the Fed (not only in December). However, the election of the Federal Reserve President for another term is an element of uncertainty in the context of the dollar. According to an interview with President Trump for Fox Business's, he is hesitating between Janet Yellen, Jerome Powell and John Taylor. The first two people practically guarantee the maintenance of the current monetary policy. Taylor, on the other hand, was previously judged to be much more hawkish than consensus. Even though, after his hypothetical election, he would probably come closer to consensus in his views, on the basis of the current candidates, we can expect a more hawkish rather than a dovish surprise.

Good zloty condition

The EUR/PLN quotations were in the range of 4.23-4.24 and the PLN/HUF pair was close to approx. 72.80 which shows that the Polish currency remained stable and relatively strong. There is no negative reaction to the Polish zloty, both to events related to Spain and to the stronger dollar. Also, the CHF/PLN pair has been very close to the last lows and amounted to approx. 3.65.

The good zloty condition may also be a result of Friday's statements of the MPC members. Jerzy Osiatyński and Jerzy Kropiwnicki suggested in interviews for the PAP that wage pressure may require an earlier start of monetary tightening than before the end of 2018. A more hawkish perception of these previously neutral Council representatives may disturb the continuing dovish consensus. In this context, November's NBP macroeconomic projections and the reaction of the Polish MPC members to the central bank's new estimates may be extremely important.

S&P Global Ratings' report was probably not a support for the zloty. It changed neither the perspective nor the rating itself, but the description of Poland's future economic situation was clearly pessimistic. S&P pointed to the risk of "over stimulating" the economy due to pro-cyclical fiscal policy and accommodative monetary policy.

According to the agency, potential GDP growth for Poland (without EU support) is in the range of 1.5-2.0%. Surprisingly, inflation projections are also expected to reach 3.5% in 2019 and the current account deficit (3.8% from 2019). However, at this point in time, it seems that the market has assessed these forecasts as too pessimistic and they have been ignored by investors.