No rate increase before the end of 2023 (Daily analysis 17.09.2020)

Probably the most important event this week is over. After the meeting of the Federal Reserve Monetary Committee (FOMC), a statement was published, new economic projections and a press conference of its chairman, Jerome Powell, were held. The dollar with no major changes.

Macro situation slightly better in the USA

While there were no high expectations for yesterday's events, this was an important moment because of the change in the inflation target announced a month ago to achieve average inflation during a "certain period". This meant a milder monetary policy for a longer time and lower interest rates over a more extended period because the Reserve will allow inflation to "shoot" 2%.

This was also the message delivered by Powell, who stressed that the Fed would allow inflation to "slightly" exceed 2% in order to make up for previous periods below this level. How long does the Reserve intend to maintain interest rates at the current level (0-0.25% range) can be deduced to some extent from new economic projections.

The Fed's preferred measure of inflation, i.e. the PCE core index, will reach 2.0% only in 2023, indicating that interest rates are not expected to change until the end of that year. With the new macro forecasts from the Fed, it is worth noting the quite strong revisions that have been made to the June projections.

The aforementioned inflation rate was raised from 1.0 to 1.5% this year and by 0.1 and 0.2 percentage points for the next two years, respectively. Macroeconomic data from the US, coming in recent weeks, mostly pointing to a higher-than-expected path for the return of economic activity, also had their reflection in the revision of GDP changes. Now, the Fed forecasts a much lower decline in US GDP this year, i.e. by 3.7% vs 6.5% expected still in June.

Also, the US labour market is perceived a little more positively. According to the Fed, the unemployment rate at the end of the year is expected to reach 7.6%, compared to 9.3% expected still in June. This does not mean that the problems in the labour market will disappear quickly - in 2023. The Fed expects the unemployment rate at 4.0%, i.e. even above the pre-pandemic level.

Increased fluctuation, but limited changes

Although Powell has "strongly" and repeatedly emphasized the accommodative (mild, market-supporting) message that the Federal Reserve gives, the dollar is now somewhat stronger. Even in the early hours of the morning, when liquidity is not so high, the euro/dollar quotations fell to about 1.1737 - the lowest level in just over a month. With the intensified activity of European investors, the exchange rate of the main currency pair rose to 1.1800 and remained just below it around midday.

A slightly stronger dollar to the euro, compared to its level before the events related to the Federal Reserve may result from improved macroeconomic projections. However, if we look at the Bloomberg dollar index (which also includes emerging countries' currencies), it is practically unchanged around midday compared to closing levels from yesterday or the day before yesterday.

The overall story for the US currency remains unchanged for the time being, although the gradual strengthening against the euro may over time slightly increase the supply pressure on the zloty. It is likely that only a sustained fall below about 1.1750, opening the way to a further depreciation below 1.17, could increase this pressure on the Polish currency. As long as we do not observe this, the zloty's quotations remain relatively stable.

Although the USD/PLN exchange rate rose slightly above 3.79 today (the upper limit for nearly two months reflecting the stronger dollar in the morning hours), it fell below 3.78 around midday. The EUR/PLN exchange rate remains relatively stable, oscillating around 3.78. For the first time in a week, the GBP/PLN exchange rate exceeded 4.90, while awaiting information from the Bank of England. Therefore, we can expect an increase in fluctuations later in the day after the meeting.