Dollar keeps depreciating (Afternoon analysis 9.01.2019)

The equity market slowly regains strength, and the dollar falls to 10-week lows. The lack of important macroeconomic data supports limited changes in the main currencies valuation. The zloty's quotations should stabilise by the end of the day.

EUR/USD close to 1.15 handle

Yesterday's market optimism (most likely related to positive talks between the USA and China) was also visible during Wednesday's quotations. The main market indexes in Europe gained more than 1%, while futures contracts for their US counterparts also indicated a positive start at the New York market session.

With no significant macroeconomic publications, currency market changes were limited, and most of the main currencies were close to yesterday's closing level. The growth on the markets weakened the yen somewhat, although, given its significant appreciation in the second half of December, it is still in a relatively good condition.

In the evening, at 8:00 p.m., the Federal Reserve will publish the record of talks from the last meeting of the Monetary Committee (FOMC). The conversations were most likely with a dovish tone, as suggested by the recent statements of the FOMC members. The prospects for interest rate increases in the next two quarters have fallen significantly. Potentially, even hawkish minutes may not cause the dollar to appreciate.

Therefore, the euro-dollar quotations should remain within a limited fluctuation range until the beginning of the US trading. After the start of the session, the dollar started to depreciate, and the EUR/USD rose to its highest level in 10 weeks. Federal Reserve Representative Raphael Bostic confirmed that the next change in interest rates could be both up and down. This was probably one of the driving forces behind the increased pressure on the dollar.

This, in turn, is good news for the Polish currency. The EUR/PLN pair oscillates at 4.30, and the weaker USD/PLN exchange rate led to a drop to 3.73, i.e. the lower limit of quotations over a period of more than two months. Today's press conference of the Monetary Policy Council (MPC) with its President, Adam Glapinski, will most likely have very limited impact on the zloty. Recent data both from Poland (low inflation) and from abroad suggest that the current message from the MPC will be maintained.

Tomorrow's preview

At 8:45 a.m., INSEE will publish data on industrial production in France for November. It may turn out to be slightly more important than usual in terms of the eurozone economy and also for the common currency, due to yesterday's dreadful data from German industry. The market consensus indicates an annual decline of 0.2% and no change on a monthly basis. Data from Germany, although the worst in 9 years, did not result in the euro depreciation, which was supported by higher than expected growth in retail sales (higher consumption) and improved sentiment due to the progress in negotiations between the USA and China. However, if a negative trend also occurs in French industry and the data is well below expectations, the supply pressure on the euro may increase. This would also not be favourable for the zloty - data from Germany, Poland's main trading partner, may slightly decrease GDP growth forecasts in subsequent periods, especially if it is confirmed in the following months.

At 2:30 p.m., the US Department of Labor will provide a weekly report on initial jobless claims. After reaching 206,000 (only 4,000 from its lowest level in nearly five decades) in the first half of December, the number of claims gradually increased in the next three weeks and reached 231,000. The median of market expectations suggests a slight decline to 226,000. Although the publication of the Department of Labor should not have a significant impact on the dollar, a further increase (in particular exceeding 235,000) may weaken it slightly given the current market situation and lower expectations for interest rate increases in the US.

At 6:00 p.m., Jerome Powell, Chairman of the Federal Reserve (Fed), will address The Economic Club of Washington. His last speeches were a little more dovish if we compared them to those from Q3 2018, which influenced the current weakening of the dollar. Further milder statements, suggesting a slower pace of monetary tightening than previously assumed, may further reassure the market that the chances for interest rate increases in the first part of the year are currently low and thus weaken the dollar even more.