New pressure on Fed (Afternoon analysis 18.12.2018)

The dollar depreciated on the eve of the Federal Reserve's decision on interest rates. The good data from the real estate market in the USA does not help much. The zloty does not show any major changes.

Limited impact of data on dollar quotations

Today the dollar weakened. Like on Monday, however, the depreciation scale was limited. The EUR/USD pair rose slightly above 1.14 today. The dollar index (DXY), which measures its value to the six main currencies, fell to its lowest level in the month. This is primarily a result of concerns about the outcome of tomorrow's potential interest rate increase by the Federal Reserve (Fed).

Today, once again the US President, Donald Trump, expressed his view on Twitter about monetary policy. He suggested to the Fed that interest rates should not be raised. Moreover, he added that the Fed should stop reducing its bond balance sheet. The Fed bought up bonds during and after the crisis in order to stimulate the economy. Currently, it is reduced by 50 billion dollars every month.

Trump's opinions do not have any major impact on the dollar valuation, the Fed is independent. However, if tomorrow's message from the US Central Bank is dovish and reduces expectations of increases next year, there may be a perception that the President is able to put pressure on the Fed's members. Given that Trump would have preferred a weaker dollar and no interest rate increases, this may have the effect of weakening the US currency.

Apart from waiting for tomorrow's Federal Reserve publications, the quotations on the foreign exchange market during the Tuesday session were relatively calm. There were few important macroeconomic publications. One of the most important was the morning reading of the Ifo index of sentiment among German entrepreneurs, which indicated its lowest level since mid-2016. The afternoon data from the real estate market in the USA was also significant. This, in turn, was better than expected. The number of building permits issued increased by 5% per month in November and the number of houses starts increased by 3.2%. In both cases, drops of 0.4% and 0.2% were expected. In theory, today's set of data should weaken the euro and strengthen the dollar. The opposite situation shows how important tomorrow's events related to the Federal Reserve are for the market.

The increase in the main currency pair, i.e. the euro against the dollar, is a good signal for the zloty. The zloty's quotations were also supported by better than expected data on the growth of average wages in the corporate sector (they increased by 7.7% y/y), which may exert pressure on inflation. As a result, the zloty basket remained stable today. This is a scenario which is likely to change tomorrow. More pronounced fluctuations can be observed on the USD/PLN pair, although in the case of significant movements of the euro in relation to the dollar, the whole basket of the zloty may record significantly increased fluctuations.

Tomorrow's preview

At 10:00 a.m., the Polish Central Statistical Office (GUS) will present data on industrial production and producer inflation (PPI) in November. The median of market expectations indicates a decrease in the production growth pace to 3.6% per year and the unchanged PPI at the level of 3.2%. After today's better than expected wage data, exceeding the consensus by the production would be positive for the zloty and would strengthen its position before the evening events in the USA.

At 10:30 a.m., the Office for National Statistics (ONS) will publish consumer inflation (CPI) data in the UK in November. Market expectations point to a slight decrease - by 0.1 percentage points - both the headline and core index to 2.3% and 1.8% respectively per year. Brexit is still the number one topic and reports on it have the greatest impact on the pound. The British Parliament's vote on the plan will take place in mid-January, so the inflation reading may increase the fluctuation range around the publication, especially if it deviates from the consensus by 0.2 percentage points (or more).

However, the Federal Reserve (Fed) evening publications at 8:00 p.m. of the statement on interest rates (0.25 percentage points increase) and new macroeconomic projections will ultimately hamper investors from any major changes in both the pound and the zloty. Half an hour later, a press conference with the head of the Fed, Jerome Powell, will begin. Judging by the dollar quotations or yesterday's drops on the equity market, investors may fear the most the dovish rise - in other words, rise with the mild tone of the press release and press conference and lower economic growth forecasts, which could even weaken the dollar given the expectations. Currency market volatility is expected to increase significantly, especially in dollar-linked pairs.