Mild Fed, Brexit still causes uncertainties (Daily analysis 21.03.2019)

Mild statement from the Federal Reserve depreciates the yields of the US Treasury bonds and the dollar, at the same time supporting the currencies of emerging markets. The political problems in the UK are growing, which harms the pound. The zloty benefits from a weaker dollar, although it returns some of yesterday's increases. The euro in the range of 4.28-4.29 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.

Mild Fed

Over the last few days, we have been pointing out that there is a high risk of dovish message from the Federal Reserve. Our expectations resulted from the weaker economic situation in Europe and the withdrawal of the ECB from interest rate increases. The unresolved issue of Brexit, the US-China trade conflict or the US economic downturn also justified the mild message from the FOMC. It is also worth remembering that there is a vivid discussion in the Fed about the average inflation target, which in the current conditions would mean a systemically milder monetary policy (price increases in subsequent quarters could go beyond 2% to catch up with the low inflationary pressure of previous years).

As a result, the Federal Reserve used current factors to significantly relax its message. Currently, according to the median estimates of FOMC members, no rate hikes are expected this year and only one in the next two years. The one announced increase, as shown in recent weeks, may disappear very quickly, which practically means that the cycle of monetary policy tightening has come to an end. Reducing the balance sheet of the central bank (which was also a form of monetary tightening) will be stopped in September.

GDP growth projections were revised downward (by 0.2% for 2019 and by 0.1% for 2020 to 2.1% and 2.0% respectively). In the case of inflation, the downward revision for both years was at the level of 0.1% - to 1.8% and 2.0% respectively. In the case of the core component, there was no revision, which seems to be one neutral signal from the Fed.

The dollar reacted with a strong weakening, and Treasury bond yields fell significantly. In the case of instruments maturing in 10-year, yesterday morning they were at the level of 2.6%, and today they are testing around 2.5%. The dollar, on the other hand, pared part of yesterday's losses (at the highest point, the EUR/USD was almost 1.1450), but is still significantly weaker than the average since the beginning of the month. The future fate of the US currency will depend to a large extent on what happens abroad, as the bar for any changes in the Fed is now set very high.

Brexit becomes dangerous

The political situation in the UK means that Brexit is becoming dangerous. Since yesterday morning alone, the pound has lost about 1.2% against the euro. A similar movement was also visible in relation to the zloty. This is because it is unlikely that next week the House of Commons will support the plan to leave the EU presented again by Prime Minister Theresa May.

Without a plan, the European Union will not want to extend Article 50, which means that the spectre of the chaotic Brexit has returned on March 29th. This is not very likely to happen because if the British plan is not supported, the Prime Minister can always count on early elections, and the moment of leaving the European Union will be postponed by one year or even more to prepare for an earlier election. However, before it happens, the market may be extremely nervous, as 29 March, the date of the Brexit, is on Friday. The inner conflict in the Conservative camp between the moderate and the steadfast members could be so fierce that without even an upcoming deadline, none of the parties would want to give way, and the spectre of closing the markets before the weekend without a resolved Brexit issue would be deadly for the sterling. In addition, there is the need for concessions from the DUP coalition, which also does not give any signals of support for the May plan. We are facing a particularly dangerous period for the pound (threat of further falls) if the political battle were to get out of control.

Stable zloty

The Polish currency is surrounded by stability. The euro moves in the range of 4.28-4.29 PLN and, taking into account the mild statement from the Federal Reserve, which supports the currencies of emerging countries, it is a justified level. The dollar is at least above the 3.75 PLN limit, which also reflects well the current opportunities and threats to both the US and the Polish currency.

In the context of current data from the Polish economy, the situation is still good or very good. Retail sales increased by 5.6 per cent year-on-year in February (5.4 per cent year-on-year) and construction production by 15.1 per cent year-on-year with expectations of 4.9 per cent. It is worth noting, that the strong growth was probably a consequence of the good weather in February, as in the case of building construction the change to plus was as much as 27.9 per cent year-on-year.