Fed plans two increases in 2019 (Daily analysis 20.12.2018)

The dollar depreciates after the Fed's decision to increase interest rates. The Bank of England notices an increase in uncertainty about Brexit and lowers the economic prospects. The market situation is favourable to the zloty.

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.

EUR/USD slightly below 1.15

The most important event of the end of 2018 is probably over. Yesterday evening, the US Federal Reserve (Fed), as expected, raised interest rates by 0.25 percentage points. At the same time, it slightly lowered its GDP growth projections for the current and next year by 0.1 and 0.2 percentage points, respectively (to 3.0 and 2.3 per cent). Inflation is also expected to slow slightly by 0.2 and 0.1 percentage points, respectively.

During a press conference, Jerome Powell, Chairman of the Fed, said that members of the Monetary Committee predict two increases for next year. This was also a result of the median of the individual expectations of each member, the so-called dot plot. This was a decrease in the expected number of increases in 2019 by one as compared to September's projection. However, hardly anyone on the market expected that the three increases would be maintained. Generally speaking, GDP projections were expected to decrease due to the global economic slowdown. Powell himself confirmed this later, pointing out that the Fed will pay attention to it. In his opinion, however, this does not roughly change the economic perspective and monetary policy for the USA. The Fed will observe the incoming data and make decisions on this basis. The chairman of the Fed also stressed that member estimates of the number of increases needed are only non-binding, individual opinions, which may change with time and new data.

The main US market indexes recorded around 2% declines and the three most important ones - Dow Jones, Nasdaq, S&P500 - were below their lowest levels in 2018. Yesterday's increase was perceived by the market as not dovish enough. The outlook for a baseline scenario with clearly communicated two increases next year with slightly worse economic prospects clearly worried investors.

Initially, the dollar was even slightly better than before the statement and macroeconomic projections publication. This morning, a clear weakening of the US currency was observed. The dollar index (DXY), which measures its value in relation to the six main currencies, fell to its lowest level in six weeks, and the EUR/USD quotations rose just below the 1.15 level.

It should be noted that the euro situation has also improved, which has an impact on the dollar's weakening. Italy submitted to the European Commission and fears of an excessive budget deficit have diminished. The factor that put supply pressures on the single currency was practically eliminated.

Uncertainty around pound

Today's statement of the Bank of England was also an important event. As expected, interest rates were left unchanged by 9-0 votes. Monetary Committee members expect inflation to fall below the inflation target of 2% in January. The pace of British GDP growth in Q4 is also expected to be slower - it is expected to amount to 0.2 per cent quarter-on-quarter, 0.1 percentage points below November projection. In the statement, the Bank of England stressed that the uncertainty surrounding the Brexit process has intensified, which, combined with the slowing economy, reduces the short-term economic outlook for the UK.

Once again, the British Central Bank states that monetary policy will depend on the form of Brexit and can basically go both ways (either accommodative or restrictive). Little is changing in the context of the pound - Brexit reports will still be the most important for its valuation, although the increased pressure from the Bank of England on the importance of this process may weaken the pound a little, despite the good (published today) retail sales data in November - an increase of 3.6% year-on-year, against expectations at 1.9%.

Zloty appreciates

The market reaction to yesterday's publications and press conference of the Federal Reserve turned out to be positive for the zloty. The weakening of the dollar and the reduction of pressure on the euro is well in line with the scenario of keeping the zloty in good shape, which is also supported by positive macroeconomic data from the Polish economy. The EUR/PLN quotations were moving in the 4.28-4.29 range today, in the same fluctuation range as yesterday. The global weakening of the dollar also triggered a significant drop in the USD/PLN exchange rate - around 3.73, i.e. to the lowest level in 6 weeks. The zloty gained about 0.2 per cent in relation to the pound and the franc. There are no significant macroeconomic events planned for today - so the zloty should remain in good shape and oscillate around current levels.