Dollar slightly depreciates, zloty appreciates (Afternoon analysis 19.03.2019)

Optimism on the broader market supports the zloty and weakens the dollar somewhat. More positive information from the Polish economy - the wage growth pace in February is close to the highest level in seven years.

Risk on

Over the last few days, the zloty has been gradually appreciating. It is in line with the weakening of the dollar, as well as strong growth in the equity market. The Polish economy is also in a relatively good condition all the time - in comparison with the largest economies of the eurozone, which recorded a significant slowdown. Data coming from Poland seem to confirm this fact. After a solid reading of the current account surplus, today's data on average wages also surprised positively.

According to the Polish Central Statistical Office (GUS), the average wage in the enterprise sector increased in February by 7.6% per year, by 0.1 percentage point above the January level. It is also close to the upper limit (7.8%) of the growth rate of the last seven years. However, inflation remains subdued (base below 1%), and the current Monetary Policy Council does not show the slightest willingness to raise interest rates. This drastically reduces the zloty's appreciation potential. Today, the euro exchange rate has fallen slightly below 4.29, i.e. to its lowest level since the first week of February. However, we should not expect deeper movements before tomorrow's events in the USA concerning monetary policy.

There is a clear increase in the appetite for risk on the broader market. The highest levels since October were reached by the index of the 30 largest companies on the German market (DAX). New highs from October have also marked indexes in the USA. The "risk on" sentiment is also supported by strongly increasing oil prices due to Opec+'s decision to extend oil production cuts. Today, the price per barrel of WTI crude oil has approached the 60 USD limit, reaching its highest level since last November.

In the light of these events, the dollar depreciated for another day. The day-to-day changes are not significant, but the EUR/USD quotations gradually increased to around 1.1360, the highest level since March 4th, even before the ECB statement, which strongly depreciated the euro and strengthened the dollar. However, before tomorrow's statement of the Federal Reserve, no major changes are expected for the main currencies or the zloty. But tomorrow's volatility could increase given the high level of anticipation of the market waiting for the meeting of the FOMC, the monetary committee in the US.

Tomorrow's preview

At 10:00 a.m., the Polish Central Statistical Office will publish data on industrial production in February. The median of market expectations indicates an annual growth at 4.8% compared to 6.1% a month earlier. Taking into account the evening events in the USA, it is rather hard to expect that these data will have a significant impact on the zloty tomorrow. However, they can support the zloty by maintaining the relatively good condition, especially as the previously published economic readings exceeded expectations (e.g. current account surplus, wage growth pace).

Half an hour later, the Office for National Statistics (ONS) will present consumer inflation (CPI) data for the UK economy in February. Both the headline CPI reading and the core CPI (excluding energy and food prices) are expected to remain at the same level as in January - 1.8% and 1.9%, respectively. Even slight deviations, especially in the case of core inflation, may cause significant fluctuations in the pound. However, Brexit will continue to have a decisive influence on how prices will finally develop. After the Speaker of the House of Commons complicated today's vote on Theresa May's plan, the uncertainty has increased, at least in the short term, which also means that potential fluctuations in the pound will increase. In the long run, any postponement of the Brexit date is positive for the pound.

The most important event tomorrow will be the one linked to the FOMC from 7:00 p.m. The Federal Reserve Monetary Committee will publish a statement after its two-day meeting at 7:00 p.m., as well as new macroeconomic projections. Half an hour later, a press conference will start with the head of the Fed and the Chairman of the FOMC, Jerome Powell. If we look at the dollar's quotations in recent days, it is clear that the market is afraid of an even more dovish position, i.e. statements that might suggest no rate hikes this year.

If the dovish statements appear, they could further weaken the dollar. It should be remembered, that one of the main factors that prompted the Fed to pause the rate increases was the collapse of the equity and bond market in December. However, the main US market indexes pared the entire decreases, so this risk element was eliminated. This will not persuade the Fed to tighten up its messages - the Fed will most likely stress the need for "patience" and will wait for the data coming from the economy in the coming months. Considering the market's behaviour, the lack of relaxation could be seen as "not dovish enough" and, as a result, strengthen the dollar.