Fed in limelight (Daily analysis 26.09.2018)

Very limited changes before the FOMC meeting. The risk of a hawkish statement from the FOMC is probably not included in the dollar exchange rate or in the valuation of the US Treasury bonds. The zloty is slightly stronger. The EUR/PLN pair in the range of 4.28-4.29.

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

• 8:00 p.m.: Publication of a statement following the September FOMC meeting and an interest rate decision (estimates: 25 basis points increase to a range of 2.00-2.25%),
• 8:00 p.m.: Publication of quarterly macroeconomic projections (median of interest rate expectations for 2018-2021),
• 8:30 p.m.: Start of the press conference after the Federal Reserve meeting.

Limited changes before important FOMC meeting

Since yesterday afternoon, movements on the main currency pair have been extremely minute. The EUR/USD pair moves in the range of 1.1750-1.1780. This is the result of support for the dollar from high yields on US Treasury bonds. At the same time, the European currency is supported by a decreasing risk of Italy adopting a budget with a high deficit in the public finance sector and lower risks for emerging markets (at the least they are not valued in the market). Both signals cancel each other out, fostering stability.

However, this peace may be disturbed in the evening. The Federal Reserve's important meeting will end at 8:00 p.m. Members of the Federal Open Market Committee (FOMC) are likely to raise interest rates (by 25 basis points to a range of 2.00-2.25%), but the perception of the statement from the central bank will depend primarily on factors suggesting further movements.

It seems that FOMC will also suggest an increase in December and three more increases in 2019. Currently, the market does not value even half of the monetary tightening next year, so the sole confirmation of June's forecasts should be positive for the dollar. However, there is little chance of an extreme strengthening on the dollar, as only an increase in the scale of increases (to 4 next year) could give a serious signal to the dollar. However, this is rather excluded (too early for such a move, taking into account, for example, the risks associated with foreign trade).

The market is also speculating about the possibility of deleting from the report the information that "monetary policy remains accommodative". If this statement disappears or is replaced by another without the word "accommodative", then it would mean that the Fed is approaching the conditions of a neutral monetary policy. This, in turn, would be a signal that we are approaching the end of monetary tightening. However, it seems that this fragment should remain. In Lael Brainard's recent speech, the subject of neutral interest rates (one that neither stimulates nor inhibits the economy) was widely discussed. A member of the Board of Governors clearly divided neutral interest rates into short and long term. This could have been a signal that current rates are not yet neutral and they stimulate the economy. However, if this fragment was removed, then it could weaken the USD, if the FOMC President Jerome Powell refrained from referring to this fact and reducing the impact of this change.

In general, the FOMC statement should support the dollar. Macroeconomic data is very good (more than 4% of GDP growth this quarter is indicated by the Fed's GDPNow model from Atlanta), and consumer sentiment is close to the highest in history. The market behaviour should also suggest FOMC to issue a hawkish rather than a dovish message. On the other hand, fears about the negative impact of foreign trade are growing and inflationary pressure has recently decreased (also in terms of core inflation). This may, therefore, prevent the Fed from moving more drastically, and thus also reducing the chance of strong dollar increases.

Zloty slightly stronger

The relatively good sentiment in emerging markets and no clear signals from the main currency pairs foster a marginal appreciation of the zloty, with the exchange rate falling to 4.28-4.29. The euro falls to a range of 4.28-4.29. The situation may change during the evening FOMC meeting, but there are no dramatic shifts expected in the context of this event either.

We believe that the message will be mildly hawkish. However, this should not have a clear impact on the EUR/PLN exchange rate, and rather the 4.30 border will be maintained. The dollar may increase slightly more, but in the case of the US currency, a moderate upward movement (about 0.02 PLN) is more likely than a strong increase.