Politics and Fed (Daily analysis 24.08.2018)

The main currencies remain stable during the morning trade. What will the market look like in Jerome Powell's speech at the Jackson Hole symposium? Minor changes on the zloty. The EUR/PLN close to the 4.28 boundary.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:30 p.m.: Orders for durable goods in the USA.
• 4:00 p.m.: Jerome Powell's speech in Jackson Hole.

Calm situation before Powell's speech

The EUR/USD quotations stayed at a very similar level as yesterday morning. The talks between Chinese and US officials in the context of future trade relations ended without results, but there was also no serious expectations that this Washington meeting could help to break the deadlock at a relatively low level. As a result, the market awaits for Jerome Powell's speech (4:00 p.m. CET) at a symposium in Jackson Hole. What kind of information will the market be looking for in the message from the chairman of the Fed?

Investors might be particularly interested in whether Powell will address the issue of Donald Trump's verbal interventions on interest rates. The US President supports the low cost of money, which he has expressed many times in his speeches. This has recently taken place in an official interview with Reuters and during a meeting with influential Republicans (anonymous sources of Bloomberg).

The Fed's independence issue in today's Powell speech would send a strong signal of opposition to the political influence on monetary policy. Powell also drew attention to this issue in an interview with the public radio on July 12th. In the "Marketplace" program, the Fed's Chairman has repeated that the Federal Reserve is "independent of political motives". However, as one month has already passed since this interview, and the issue has come back last week, it is quite likely that Powell will recall this in the form of an official speech. This would send a positive signal to the dollar.

The dollar can be also supported by the issue of emerging markets and the impact of the Fed's policies on their economic condition. So far, the Fed has taken the view that the problems of some emerging markets are isolated and that FOMC has little influence on them. A restatement of this would also be positive for the dollar because of the interpretation that interest rate hikes are unlikely to be slowed down by the economic problems of some emerging economies.

The final crucial issue in the coming hours is the overall view of the US economic situation. If it is optimistic, it should support interest rate increases. However, in general, the most important question will be whether there are any suggestions for the Fed's independence. It seems that if only this element is included, it should be positive for the dollar, and if it is omitted, it would rather show FOMC's aversion to face the White House directly and could be perceived by some as a weakness of the Head of the Federal Reserve regarding pushing through rate hikes in 2019 (negative signal for USD).

Zloty still strong

The zloty remains stable in relation to the euro or the Czech koruna. In turn, given the generally weak forint, the zloty is close to reaching the historically high against the Hungarian currency.

For the zloty, as in the case of the global market, Powell's speech will be important. However, it seems that the sentiment towards the zloty is so good that even in the case of hawkish suggestions from the FOMC President (details in the previous paragraphs), the EUR/PLN should not significantly exceed the 4.30. As a result, the core scenario for the Polish currency is to maintain the recent increases and relatively good position in comparison with other currencies of emerging countries.