Daily analysis 26.10.2017

The US dollar is negatively affected by lower yields of the US government bonds. The ECB meeting and the decision on quantitative easing will be important for the euro. The zloty remained relatively stable in relation to the main currencies. The afternoon's zloty quotations should be dependent on the decision of the European monetary authorities.

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

• 1:45 p.m.: ECB's decision on interest rate and asset purchase program,
• 2:30 p.m.: The beginning of ECB President Mario Draghi's press conference,
• 2:30 p.m.: Weekly report on initial jobless claims in the US (estimates: 235k).

Weaker dollar before ECB meeting

Initially, yesterday afternoon had perspectives to be beneficial for the US currency. Orders for durable goods overseas clearly exceeded market estimates and August's data was revised upward. Positive signals for the dollar came from the debt instruments market. The yields of the US Treasury bonds maturing in 5 years exceeded 2.08% and there were only 7 core points missing to reach the highest levels for over 6 years.

Despite this information, the dollar did not want to appreciate. In turn, when the situation on the market deteriorated (lower than consensus results of the US companies) and the weaker sentiment began to depreciate the yield of the Treasury bonds, we faced a rapid USD drop and increases of the main currency pair. This shows that the sentiment towards the dollar is still negative, because with good information it does not appreciate, and when worse information comes to the market, it quickly loses value. Today, however, due to the ECB's afternoon meeting, it is likely that the impulses on the foreign exchange market will mainly be generated by the euro rather than the dollar.

Possible scenarios during the ECB meeting

A key element of today's message from the ECB will be information on the possible reduction in quantitative easing from the beginning of next year. Bloomberg's information on the possible QE tapering from 60 to 30 billion per month and the continuation of this operation until September 2018 appears to be a core market scenario.

The most probable scenario is that the ECB's balance sheet will be increased by another 270 billion EUR (9x30 billion EUR) in 2018. Reuters, on the other hand, based on its survey assumes that the reduction will be smaller - from 60 to 40 billion, but it is not clear whether the continuation will take 6 or 9 months.

It is worth noting that the Reuters option is more dovish than Bloomberg's because after six months or nine months, the ECB is unlikely to reduce the QE from 40 billion to zero immediately, and the reduction will be more gradual (e.g. from 40 billion to 20 billion). This would mean that the quantitative easing would take longer and ultimately result in larger assets purchasing (probably at least 360 billion EUR) than Bloomberg's option. The QE reduction to 40bn EUR per month should, therefore, be negative for the European currency and will probably reduce the yield of the eurozone's government bonds.

Another dovish solution would be to resign from defining quantitative easing restrictions and suggesting such a move only at the meeting in December. This would mean a lack of consensus within the ECB, which would probably result in a slower winding down of the QE in the following quarters.

A solution which assumes smaller assets purchase than 270 billion EUR next year could be perceived as hawkish. This would be e.g. a reduction of QE to 30 billion and a continuation only for 6 months. In general, however, the ECB will want to send dovish rather than hawkish signals, mainly due to recent euro increases and maintained on a low base inflation.

In turn, it seems that Mario Draghi's press conference should attract slightly less attention than usual if the QE modification is announced at 1.45 p.m. Repeating the issues from the previous meetings concerning the possibility of lengthening the quantitative easing or maintaining interest rates "at the current level for a longer period of time, far exceeding the time horizon of buying net assets" should not cause greater emotion in the market.

Zloty stabilisation

The zloty remained stable in relation to the main currencies. The EUR/PLN pair close to the 4.24 boundary, while the franc is about one penny above yesterday's lows at the level of 3.62 PLN. Minor changes are also observed on the pound or the dollar. However, this calm is likely to be disturbed by the ECB's meeting.

Dovish scenario (details in the previous paragraphs) may slightly depreciate the EUR/PLN pair. However, other main currencies in relation to the zloty may react with increases to the perspective of greater assets' purchase than consensus by the ECB. With the dovish stance of the European monetary authorities, the appreciation of the pound, franc or dollar in relation to the euro is more likely than the weakening of the euro against the zloty. In the case of hawkish turns of events, the reaction should be the opposite - the euro may be more expensive, but other currencies may have to face depreciation.