Daily analysis 29.07.2015

How the recently published data might change the Federal Reserve statement and investor's view on the dollar? The Russian Central Bank halts its currency purchases. The zloty weakened in the morning but the 4.13-4.14 levels should not be crossed.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• 20.00: The US Federal Reserve publishes its statement after July's FOMC meeting

What can be changed in the statement

The volatility has significantly diminished on the EUR/USD since yesterday morning. It is a result of muted expectations before today's Federal Reserve meeting. The market is not convinced whether we will get any signals from the Committee regarding the timing of interest rate hikes.

When we look at the construction of the FOMC announcement the first sentences describe economic events which have appeared since the last meeting. In June's statement, comparing it to April's, the Fed pointed out a moderate economic expansion which was a result of better economy after a weak first quarter. Today Janet Yellen and her colleagues should also view the economy as “moderate”

We should not see any major changes in the job's market. The “payrolls” for June, taking into account the most recent revisions, were similar to the previous period. Moreover, it is not clear whether the lowest in 40 years jobless claims were disturbed by the solid condition of auto industry (less maintenance during Summer). It is also an argument to leave the paragraph unchanged.

Slightly less optimistic (negative for the dollar) might be the consumer's situation. The retail sales dropped in June and the level of confidence also decreased. As a result an improvement showed in June's statement may be changed to a less optimistic phrase. The description will be unchanged regarding fixed investments, especially the factory orders dropped in June.

Not many changes are expected in the description of inflation but the phrase regarding stabilization of energy prices are expected to be deleted after the 20% drop in crude prices since mid June. It might be regarded as a threat to the upside trend of the inflation.

Theoretically we should get a more dovish message from the economic description. The Federal Reserve might, however, decide that it is moving slightly towards the interest rate hike and the move can be taken even at the next meeting. During the last meetings the Fed claimed that risks regarding the future economic conditions and job market are “nearly balanced”.

The word “nearly” was suggesting that the probability of disappointing readings is slightly higher than the odds for better data. If “nearly” disappears we should consider the statement as more hawkish even taking into account the fairly dovish description of the economy in the first part of the announcement. It would push the dollar higher to most currencies.

Rouble under pressure

Today the Russian Central Bank (CBR) announced that it is halting foreign currency purchase. The operation has been running since mid May and had two goals. Firstly, the CBR wanted to stop the appreciating currency and secondly it wanted to rebuild the currency reserves. The central bank announced that pausing purchases is a result of higher volatility on the local currency market.

Briefly it means that the most recent rouble weakness forced the central bank to stop the operation. It is also worth noting that when Brent oil was above the 60 USD range the central bank failed to prop up the reserves which rose only 8 billion from the lowest point. Now the CBR holds reserves worth 358 billion USD while at the beginning of 2014 it was more than 500 billion USD.

The current slide in the rouble value was mainly caused by the oil drop. The twenty percent slide of Brent pushed the rouble around 13% lower to the US dollar. As a result, we may assume that each 10% drop in the oil price is pushing the currency lower by 6-7%. It means that if we get new lows on the Brent the USD/RUB should rise toward the 65 mark with no new negative geopolitical signals.

The foreign market in a few sentences

In today's Fed statement only subtle changes are expected. If the Federal Reserve only pushes for a description of the current situation the market might regard it as a dovish view. On the other hand, if the FOMC deletes from the announcement “nearly” we may see a significant dollar appreciation and a slide towards 1.0950 on the EUR/USD. The first solution is slightly more probable but the dollar weakness is not expected to be significant.

The franc is markedly lower

The zloty remained stable on Tuesday. The situation changed before 10.00 CET. At that moment we observed more pressure on the Polish currency. It might have been a reaction to some weakness of the Turkish lira or fears by a number of investors before the FOMC meeting which can be more hawkish than most expect.

Currently, however, there is no concrete reason to push the EUR/PLN above the 4.13-4.14 level even if the Fed slightly signals a rate hike today. Still the upcoming macroeconomic data should be the main reason behind any decision. The data, however, does not point to any solution.

Anticipated levels of PLN according to the EUR/USD rate:

Anticipated GBP/PLN levels according to the GBP/PLN rate: