Italy again causes problems (Daily analysis 27.09.2018)

No major surprises from the Federal Reserve. The lack of agreement within the Italian government on the budget increased the pressure on the euro before midday. Inflation from Germany may be clearly higher than the economists' consensus. The zloty is revising the last strengthening. The euro exchange rate returns to 4.28 PLN.

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.

After Fed meeting

Representatives of the Federal Open Market Committee (FOMC) can be satisfied with investor reaction yesterday. The combination of changes in the statement, revision of macroeconomic forecasts or press conference did not result in more pronounced market changes. The dollar's valuation at the end of the FOMC message was analogous to the one before the publication of the results of the two-day meeting. EUR/USD also ended the US session close to the 1.1750 boundary.

The path of one more interest rate increase by 0.25 percentage points this year and three in the next year (after yesterday's decision interest rates are in the range of 2.00-2.25%) has been maintained. The GDP forecasts for the current and next year have been revised upward. Interestingly, however, is the fact that none of the words (except for the month) were changed in the first two paragraphs of the statement after the Fed's meeting. In the third one, however, the passage saying that "the monetary policy remains accommodative" was deleted. During the conference, Powell underestimated this fact, suggesting that this was a good time to eliminate this statement, as we are approaching an interest rate range that members see as neutral. However, this does not affect further movements of the FOMC at this point in time. Yesterday, we pointed out that the deletion of the word 'accommodation' would be a dovish signal, but it seems that after the broad explanation of this fact by Powell the decision can be considered relatively neutral.

Taking into account all elements of yesterday's FOMC statement, it seems that the US interest rate increases should be continued at a rate of 0.25 percentage points for the next four quarters. The market does not believe in this scenario, assuming that by September next year only 0.6 percentage points of monetary tightening will be achieved. The fulfilment of the FOMC suggestion should support the dollar, especially if the economies of emerging countries or the eurozone looked weak compared to the US boom.

Italy fails. Inflation from Germany

In the case of Europe, a lot of information has been coming in the context of Italy since the morning. The media on the Apennine Peninsula reports that the dispute between the leaders of the ruling Five Star Movement and League and the Minister of Finance may deepen in the context of the budget. The head of the finance ministry demands that the deficit should remain below the 2% of GDP, while political leaders lean towards 2.4% of GDP.

However, the most important issue is not the deficit itself, but the stance of the Minister of Finance Giovanni Tria. He seems to be a guarantee for the market that the populist tendencies of the current government will be halted. If Tria resigns, this guarantee disappears. The whole turmoil resulted in a significant increase in yields of Italian treasury bonds until the morning (on 10-year securities it reached the 3.00% level) and a decrease in the EUR/USD pair (going below the 1.1700 boundary). In the afternoon and evening, talks are planned to take place inside the Italian cabinet (ANSA information). The loss of Tria's position may be a strong negative signal for both the current euro valuation and the condition of the Italian debt.

Negative signals from Italy for the euro reduce the relatively high inflation readings from the German lands. Inflation for September in annual terms for the largest part of Germany is higher by about 0.3 percentage points compared to the August readings. Economists' forecasts assumed it would remain at the same level as in August (2.0% y/y). Thus, it is possible that data at 2:00 p.m. may indicate that prices in Germany increased by as much as 2.3% y/y in September, which would mean that they would reach almost 7-year highs.

Zloty losses most of its increases

Yesterday afternoon was good for the zloty and the EUR/PLN even fell to 4.27. Today, however, a significant part of this movement was corrected and around midday, the exchange rate was close to 4.28. Nevertheless, it is still worth stressing that the changes are marginal. A slight strengthening of the dollar on the global market brought the USD/PLN exchange rate to the range of 3.65-3.66, but also, in this case, the increases are small and are in the limited range of 0.02 PLN.

It seems that the next hours on the zloty should also be calm. Only serious events within the Italian government (the resignation of the finance minister) could weaken the zloty, especially in relation to the dollar. However, even with this negative development of the situation, the EUR/PLN exchange rate is likely to remain stable and the risk of exceeding the 4.30 limit by the end of the week is low.