Hawkish Fed's statement (Daily analysis 18.10.2018)

The US currency appreciated after the minutes of the last meeting of the Federal Reserve were published, although the gains were limited. There is no clear dollar appreciation which helps the zloty to stay relatively strong - the EUR/PLN pair still below 4.30. Retail sales in the UK are failing.

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 depreciates but drops are limited

Yesterday evening's most important event was the publication of the record of talks (minutes) from the last Fed meeting. Although the dovish message flowing from them was not expected, the hawkish tone managed to surprise the markets a little. Attention was drawn to a fragment regarding the discussion on the level of interest rates in the long run. Most members expected interest rates to be above their estimation of a long-term interest rate (market-neutral) at the end of 2020 and 2021.

This may mean that, if the US economy continues its growth pace, it will be necessary to accelerate interest rate increases pace to prevent it from overheating. As a result, the dollar strengthened and the main currency pair, the EUR/USD, fell below 1.15. However, looking at the quotations since the beginning of October, which have fluctuated between 1.14 and 1.16, this is, in fact, only a small change. However, although the dollar's appreciation will be difficult to avoid in the long run, the EUR/USD quotations should oscillate around 1.15 over the coming trading days.

The aforementioned narrow range of EUR/USD fluctuations is a good signal for the zloty, which is a perfect situation for maintaining a relatively good valuation as compared to basic currencies. The EUR/PLN quotation was still slightly below 4.30 today, and the USD/PLN pair was approx. 3.73 around midday. Recent macroeconomic data from Poland, which was weaker than expected (e.g. industrial production, wages and core inflation), suggests that the zloty is likely to weaken gradually. And the dollar's appreciation can only accelerate this process.

Again we saw worse than expected data coming from the British economy. Yesterday, the pound weakened due to lower than consensus inflation, but today retail sales have failed somewhat. In September, it increased by 3.0 % per year, 0.6 percentage points below expectations. The slightly more important core reading (excluding the highly volatile vehicle and fuel sales) was 3.2%, although the median of expectations indicated 3.7%.

This data, however, had a limited impact on the pound quotation. The most critical issue remains Brexit and the unresolved subject of the Irish border, in particular in the context of the forthcoming summit in Brussels. UK Prime Minister Theresa May suggested in her evening speech to European leaders that she was considering extending the transitional period, which is currently 21 months and bonds the UK with EU law for the remaining period. While the postponement of the Irish border agreement does not solve the problem, breaking the deadlock in the negotiations may support the British currency and increase its value in relation to the main currencies.