Dollar falls after Powell's speech (Afternoon analysis 24.08.2018)

24.08.2018 16:33|Bartosz Grejner

The US currency had weakened before the Federal Reserve Chairman spoke at Jackson Hole. The Polish currency benefits from the dollar's weakness and stands out from other emerging currencies - solid data from the Polish economy may be supported next week by an equally good inflation reading.

EUR/USD keeps 1.16 level

While awaiting the speech by Jerome Powell, the Chairman of the Federal Reserve, the dollar is once again depreciating today. The US currency gave back all its profits until 3:00 p.m. yesterday, and the EUR/USD exchange rate rose to 1.16. Data from the US economy that came in the afternoon also did not help.

Orders for durable goods, which may be a good indicator of industrial production, fell by 1.7% per month in July, although they were only expected to fall by 0.5%. Excluding transport, orders did not impress - an increase of 0.2% was also below the market consensus (0.5%). Moreover, in both cases, last month's increases were revised downward by 0.1 percentage points.

The dollar weakness had a positive impact on the zloty, which was appreciating against the main currencies. The EUR/PLN pair was quoted in the 4.27 - 4.29 range and the USD/PLN pair in the 3.69 - 3.72. However, the most important event today was Powell's speech during the symposium in Jackson Hole.

Powell in his speech did not refer in any way to President Trump's words which suggested that he preferred lower interest rates. As expected, this lack of comment initially weakened the dollar. Some market participants may perceive this as a bend under the pressure made by Donald Trump and a decrease in the chances of the current pace of rate hikes.

This lack of reference to the US President's comments does not mean that the Fed's President will now opt for lower interest rates. In his speech, Powell stressed that strong economic growth will be continued and that the risk of the economy overheating is not likely to increase. In his view, there are no strong signs that the 2% inflation threshold will be exceeded.

If the political factor is eliminated, Powell's speech did not bring any new details for the dollar. Thus, in the end, after the fluctuations calm down, the US currency will most likely gradually return to an upward trend. However, today's dollar weakening and the lack of reference to Trump's words are a good signal for the zloty. Its quotations versus the main currencies are probably relatively stable and the risk of significant changes during the rest of the day seems limited.

Next week's preview

In the mid-week, an increase in activity in the foreign exchange market can be expected. On Wednesday, the Bureau of Economic Analysis (BEA) will present data on the growth pace of the US GDP for the Q2. This will be the second reading, the preliminary data showed an increase of 4.1% year-on-year. Subsequent readings of the economic growth pace in the USA are different from the first publication (often being higher). An upward revision of 0. 2 percentage points or more could strengthen the dollar, although its appreciation would probably not be so strong.

The reason for this is that the market may be focused much more on the following day's events. BEA will publish July's PCE inflation data in the US- this is the preferred type of inflation that the Fed takes into account in its projections. Although the data is published slightly behind the consumer inflation (CPI), it may have a significant impact on the dollar. The median of market expectations shows an annual increase from 1.9% to 2.0% in the case of the more important core index (excluding energy and food prices). Even a deviation of 0.1 percentage points from the consensus may cause significant fluctuations of the dollar, and an increase to 2.1% would mean the highest level in 6.5 years.

Friday may be important for the euro or the zloty. The Polish Central Statistical Office (GUS) will publish data on consumer inflation (CPI) in Poland in August and Eurostat will publish an analogous index for the eurozone. A positive reading for Poland (consensus: 2.0% year-on-year) would be in line with the recently solid data coming from this country. For the euro, the core index data will be the most important, although the final impact may be limited. For the time being, it is relatively unlikely that the European Central Bank will change or specify its position on the increase in interest rates.


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See also:

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Politics and Fed (Daily analysis 24.08.2018)

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