Dollar weakens (Daily analysis 27.02.2019)

The pound and some emerging market currencies benefit from the dollar's weakness. Discussions about fundamental changes in monetary policy can also harm the US currency. The zloty appreciates in relation to the main currencies (except for the pound), and the Polish currency remains at low levels in relation to the forint.

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

• A lack of macro data may noticeably impact the analyzed currency pairs.

Weakening of the dollar

Yesterday's speech by Jerome Powell, Fed's Chairman, before the Senate Banking Committee was not particularly exciting for the currency market. There was a discussion about the labour market and uncertainty about external signals for the US economy (Brexit, trade conflict, the situation in Europe and the deteriorating condition of the markets at the turn of the year). The Fed is still not sure what is causing the low rate of economic activity of men in their prime (perhaps a serious opioid crisis in the USA). In turn, according to Powell, the wages of the economically more impoverished people are now rising more than on average, which can be considered as positive information.

Although there have not been many monetary policy suggestions from the Fed's Chairman, the dollar is weaker than yesterday. This could be the result of a stronger pound. The flow of capital to the British currency may weaken the dollar somewhat. Moreover, the market could recall a series of presentations from before the weekend, in which leading representatives of the Federal Reserve (Richard Clarida or John Williams) mentioned the discussion on a symmetrical inflation target. What can it mean?

The Fed fears that inflation expectations may be less attached close to the 2% limit than in the past. This increases the risk of deflation, which, according to Japan's experience, is very difficult to cope with. To prevent this, the Fed may decide to use an average inflation target. If, for example, inflation is below the target for four years (let's say 1.5%), then for the next four years the Fed would like to keep inflation above this target (i.e. 2.5%), this would mean a milder monetary policy during the revival period. The opposite scenario is also possible. In developed economies, there is a problem with too low inflation (difficulties in raising and keeping inflation close to target) rather than too high. The discussion on the application of such a policy is ongoing in the USA, but if it was actually applied, it would rather worsen the condition of the dollar.

The debate on changes in monetary policy is, of course, a question of at least quarters, if not years. However, a rather broad discussion on this issue also shows the current moods within the FOMC. They are more dovish than hawkish, and this is likely to continue over the next few months, which could also harm the dollar.

Zloty appreciates

Despite the strong fiscal stimulation announced in recent days (the Family 500+ child benefit program and the thirteenth pension), Minister Teresa Czerwinska said in an interview with PAP that she "is not currently considering amending the budget law". She also suggested that to some extent these expenses will be covered by a smaller share of the subsidy to the Social Insurance Fund (FUS). Last year, according to Minister Czerwinska, the Social Insurance Fund blocked subsidies of over 10 billion PLN. If this year's FUS spending would also be smaller, it will be directed at 500+ program and the thirteenth pension.

Investors calmly accept the recent fiscal stimulation, which has a much more consumer than developmental character. The panic associated with similar plans three years ago turned out to be exaggerated, so now both investors and, for example, rating agencies will refrain from making a final assessment of the plan. If it turns out that there is a real risk of exceeding the 3% deficit in the public finance sector or violation of the expenditure rule, then the reaction may be violent. However, it should not be expected in the coming months, especially if the economic situation remains quite good.