Daily analysis 28.07.2016

The Fed is slowly getting the market prepared for a possible monetary tightening. However, the dollar is clearly losing value. New reports regarding sentiments of British consumers are weak, but not catastrophic. The zloty remains quite low, considering the external condition.

Most important macro data (CET – Central Macro Data). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

• 14.00: Initial data regarding consumers inflation from Germany in July (estimations: positive 0.2% m/m, positive 0.3% y/y).
• 14.30: Weekly jobless claims (estimations: 262k).

Dollar wears-off despite relatively hawkish FOMC

Very little market participants expected the Fed to make some serious decisions regarding the monetary policy. We also expected a relatively moderate announcement from the FOMC. However, we anticipated attempts of suggesting that rate hikes are near. These expectations were not fulfilled to a significant degree, but the dollar clearly lost value and this reaction can be considered as surprising.

The Federal Reserve modified the first part of the announcement to a significant degree. Currently, the Fed claims that, “the labor market has strengthened since the previous meeting.” Moreover, payrolls, as well as the other labor market indexes, have been showing a certain increase in the use of workforce in the past months. The FOMC also took note that, “expenses of households have increased strongly.”

On the other hand, “investments of enterprises remain weak and the market measures of the future inflation remain low.” However, the economic description needs to be considered as generally positive, especially taking into consideration a strong increase in consumers expenses.

A new statement appeared regarding the future FOMC actions. It states that, “the short-term risks for the economy decreased.” This statement can be interpreted as less severe than expected Brexit results, as well as the return of the amount of workplaces in the USA to the level that sustains a decrease in unemployment. Thus, this is a hawkish message that suggests a nearing decision regarding rate hikes.

The fact that Esther George also voted for rate hikes, can be considered as a sign of the Fed turning in a more hawkish direction as well. The Kansas Federal Reserve chairwoman already expressed her support for the monetary tightening in March and April. However, in June she did not see the necessity of increasing interest rates and supported the FOMC consensus. Thus, in her opinion the risks for the American economy decreased to a point, in which rate hikes become justified.

In general, we may assume that the FOMC message is turning towards a faster, rather than slower modification of the monetary policy. This would justify at least a small portion of appreciation of the American currency. However, this growth was temporary. The EUR/USD went from 1.1000 to the area of 1.0960, only to quickly work-off the losses and grow above 1.1100 during the European session today.

What's interesting is that this move has not been confirmed by the behavior of the American treasury bonds. Profitability of two-year treasury instruments only went down by one base case point. Such strong growth on the EUR/USD could be justified by a lower spread between the euro zone bonds and the American bonds, but this did not happen either.

As a result, it's possible that a wear-off of the dollar may be temporary, or it was a result of a significant uncertainty before the Bank of Japan meeting, as well as the GDP data from the USA. It's much easier for an unintuitive move with quite a small liquidity. In our opinion, yesterday's Fed meeting confirms that in the long-term the Federal Reserve will slowly begin to prepare the market for a meeting in September, on which the probability of rate hikes will be high.

New data from UK is weak, but not fatal

Two new reports concerning British consumers appeared during the past few hours. The first one was made by YouGov/Cebr. It showed that sentiment of Brits went from 111.3 to 106.6 points in July. This was its lowest level since 2013. However, it's also worth noting that YouGov/CEBR prepared a special survey from the period shortly after the referendum as well. In this survey, index's decline amounted 104.3 points, meaning it was larger than in July.

The condition of British households was also examined by the PwC in its report that is made each 3-4 months. The amount of households thinking that their disposable income will decrease within next twelve months increased in comparison to their amount from March. On the other hand, the consumers optimism index remains higher than it was in any period between 2008 and 2014. This might suggest that the Brits don't expect a slowdown similar to the one from the 2008/2009 financial crisis, as well as the debt crisis in the euro zone in 2011/2012.

Zloty is relatively weak

There is no sign of the zloty's weakness against the franc, as well as against the dollar. However, the EUR/PLN continues to remain quite high, taking into consideration favorable external conditions. The zloty is weak against the forint as well and lost approximately 0.3-0.4% since yesterday. However, we continue to expect that the Polish currency will work-off the recent losses.

On the other hand, the decision of the Bank of Japan on Friday is a certain unknown. The dissonance of estimations in the market is so significant that it is really difficult to say what is the actual consensus, as well as what is included in the current prices. The same unknown are the changes in fiscal policy that will be revealed next week. If the BoJ disappoints the expectations and the yen strengthens clearly, it may be a negative element for the PLN during quotations on Friday.