Dollar's wings were cut (Daily analysis 7.01.2019)

Friday's speech by Jerome Powell and other comments from the Fed increases risks for the dollar. Mixed data from the eurozone. No strong impulses for the zloty. The euro still costs around 4.30 PLN.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 4:00 p.m.: ISM index for the US service sector (estimates: 59 pts).

Problems for the dollar

Perhaps Friday's speech by the chairman of the Federal Reserve may change the medium-term outlook for the dollar. Chances are growing that the US currency will be weaker than it previously seemed. Jerome Powell has surrendered to market pressure, which may mean no interest rate increases in the first half of this year, and perhaps even the end of the monetary tightening in this period.

Powell, contrary to his speeches in previous months, clearly suggested flexibility in monetary policy. And not only in the case of interest rates but also in the case of a possible suspension of the Fed's balance sheet reduction. As early as mid-December the Fed's chairman had strongly denied the need to pause the Fed's balance sheet reduction while on Friday he was much more open concerning this issue.

Jerome Powell assured that he carefully considered the concerns of the market, probably referring to falls on the markets or the spread between low and high credit rating bonds. It seems that Powell had previously expressed the view that a tightening of financial conditions was needed. William Dudley, the head of the New York Fed, who retired a few months ago, also had a similar opinion.

The information provided by Powell is extremely important, as there are many signs that the Federal Reserve has practically abandoned the path of monetary policy tightening. The chances of an increase in the first half of the year are low since it is also unlikely that leading indexes will improve significantly and the fear observed on the market will quickly disappear. There is also a limited chance that price increases will accelerate even though wage growth continued at the end of 2018. (3.2% year-on-year, i.e. the highest for a decade).

Powell's view begins to be shared by the formerly hawkish part of the FOMC members. On Friday, Loretta Mester said on CNBC that she did not see the need to raise interest rates considering inflation. She also said that the Fed must take into account the situation on the markets and the expectations of entrepreneurs, probably referring to drops in markets and weaker ISM readings.

A dovish Fed is negative for the dollar. The Federal Reserve is very sensitive to market signals, especially those that may suggest a restrictive monetary policy. At the moment, the bar for interest rate increases is set very high, which means that there are no positive signals for the dollar from the Fed's monetary policy.

Mixed data from the eurozone. Stable zloty

Again, from Germany came weak data on orders in the industry for November (tomorrow data on industrial production will be available). The orders dropped by as much as 4.3% year-on-year, the worst result since mid-2012. The particularly deep decline occurred in orders from the eurozone, where the monthly decline amounted to 11.6%, which was the most significant decline in orders in 10 years. Bloomberg points out that this could have been caused by smaller orders in the aviation sector (e.g. in October). In general, however, orders from the chemical and electronic industries (e.g. computers) also looked weak, which dropped by 5.1 and 3.2 per cent.

In turn, retail sales in the eurozone were better than expected, increasing by 1.1% year-on-year, with expectations at the level of 0.4% year-on-year. Additionally, data for the previous month was revised upward (from 1.7% to 2.3%). As a result, eurozone consumers appear to be in better shape than previously thought.

Regarding the influence of external factors (the Fed, data from the eurozone) on the zloty, the dovish signal from the FOMC should help the Polish currency. The risk of weakening of the zloty in the average term has decreased. If there is no negative information from the national or EU economy, the zloty's condition is not likely to deteriorate in the following months.