Daily analysis 26.07.2017

The EUR/USD has fallen below 1.1650 before the Federal Reserve meeting. Data from the UK is in line with expectations, but the GDP figures are unfavourable. The zloty remains weak. EUR/PLN close to border 4.26. Comments from Deputy Prime Minister Morawiecki about the Polish currency for Bloomberg Television.

Macro key data (CET time- Central-European). Estimates of macro data are based on Bloomberg information unless marked otherwise.

• 4.00 p.m. Sale of new houses in USA (estimate: 615 tys.),
• 8.00 p.m. Statement's publication after Federal Reserve's meeting.

A slight dollar strengthening

For the US currency, yesterday afternoon was unfavourable. The EUR/USD pair has exceeded the 1.17 boundary while establishing new, less than two-year, peaks. Moreover, only a few pips were to reach the highest level since the beginning of 2015. In the evening, however, the dollar has strengthened after a slightly higher than consensus (121.1 pts vs 116.5 pts) reading on consumer sentiment. This indicator has been 4 points below the 17-year records.

The evening dollar's strengthening was also confirmed by the behaviour of the debt instruments market, although the movement on the US bonds began much earlier than in the currency. It's possible that some investors may expect a more hawkish statement from the Federal Reserve whose publication is scheduled for 8 p.m. today.

The hawkish message would be, for instance, the start of a reduction in the Fed's balance at today's meeting. The scenario (that these actions could be launched in the coming months) is unlikely as the FOMC's opinion has prevailed over the past weeks. Now, the launch of this process has not been a base scenario but it can not be ruled out.

Another important matter is the issue of US inflation. The pace of price growth has slowed down considerably. However, it will be important to assess the reasons for this slowdown. If the opinion that it is "transitional" remains, then a slight appreciation of the dollar may be expected. In case of greater doubts about the reasons for not returning the PCE towards 2% of the target, the message can be received as dovish.

In general, however, the Federal Reserve will probably want to formulate a relatively balanced statement, and for the next few weeks through public appearances, they will explain to us that the path of slow monetary policy tightening has still been a base scenario (in September, the balance sheet, and possibly of interest rate hike in December).

Data from the British Isles without positive surprises

In the morning, the ONS published a preliminary GDP reading of the UK for the second quarter. The reading was in line with the market consensus (+ 1.7% YOY, + 0.3% MOM). It is worth noting that the growth components can be alarming, especially the very weak condition of the industry.

Industrial production has fallen by 0.4% compared to the previous quarter (seasonally adjusted). The same result was noted by its main component, i.e. manufacturing. Results in the construction sector should also be considered unsatisfactory. Compared to the first quarter, it was contracted by 0.9%.

Production has also fallen by 0.4% year-over-year and construction by 0.8% YOY. In general, however, almost all of the growth was generated by services (2.3% YOY and 0.5 QOQ). The data shows that the manufacturing sector has been in relatively poor shape and therefore the chances of interest rate hikes in the coming months should be limited. Also, the lack of wage pressure (a decrease in British's purchasing power) is also not an argument for tightening the monetary policy, which should ultimately keep the pound under pressure.

The zloty is still weak

After a very weak end of last week and a short-term rebound during Monday's session, the zloty has remained weak. The EUR/PLN has quoted close to 4.26, and PLN/HUF pair has still been trading within 4-month lows.

On Bloomberg Television this morning, Mateusz Morawiecki spoke about the condition of the Polish currency. Deputy Prime Minister of the Polish Government stated that, “we’re comfortable with this level of the zloty. If it strengthened to below 4.00/EUR it would be dangerous for exporters, but I’m generally in favour of stronger zloty.”

In the next few hours, one should not expect a breakthrough in the zloty. The market may be waiting for a message from Brussels about recent events in Poland, but there is little chance that it will end with a groundbreaking message. Moreover, in the context of the FOMC statement, it is unlikely that the current levels on the Polish currency would be dramatically affected.