Politics in the spotlight (Daily analysis 14.03.2018)

No breakthrough in the inflation readings and political issues put pressure on the dollar. Fairly dovish message from Mario Draghi. The zloty remains weak. The EUR/PLN has been testing the highest levels for three months.

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

• 13.30: Retail sales from the US for February (survey: 0.3% m/m),
• 13.30: Producer prices for February (survey: 0.2% m/m oraz 2,8% y/y).

US in focus

Yesterday’s news from the US put some pressure on the dollar. The EUR/USD rose to around the 1.2400 level. The bullish move on the main currency pair was eased after dovish comments from Mario Draghi in the morning which caused the pair to pare gains to 1.2370.

Besides the widely discussed moderate inflation pressure (readings exactly matched economists expectations) failed to impress a part of the market, which expected somewhat higher price pressure, there were also two important political events in the US.

The Secretary of State, Rex Tillerson’s departure from the White House increased fears of further trade restrictions between the US and its main counterparts. Uncertainty might have also increased news from Pennsylvania.

In this state, a special election was conducted in one of its constituencies. The Democratic candidate probably received several hundred votes more than its Republican counterpart. Despite this, the election still looks too close to call (no final results have been published yet) the outcome may be surprising as Donald Trump scored a result 20 percentage points higher than Hillary Clinton in 2016. Moreover, in that constituency the Republicans have had their representatives in the House for the last 14 years.

Events in Pennsylvania can be seen as a warm-up to the midterm election to Congress (1/3 of the Senate and all of the House seats are set to be in play) especially that Democrats may see this event as a good moment to take control of at least one chamber of the Congress. More political volatility may be negative for the economy and slow the Fed’s rate hike path.

Dovish from the ECB. Weak zloty

In the morning Mario Draghi’s statement was published. The ECB chief was still uncertain regarding the future inflation path in the eurozone. He stressed arguments to keep the monetary policy loose and wait for the first rate increase after the QE operation is concluded.

One of the most important parts of Draghi’s statement was a message that the recent euro appreciation may be more a result of exogenous factors than an outcome from higher GDP growth. It may put downward pressure on inflation. Draghi also noted that the exchange rate would be monitored and probably the ECB will not hesitate to keep the monetary policy loose, if the strong currency keeps inflation far from the target. It can be seen as a negative signal for the euro.

Regarding the situation on the PLN, the somewhat weaker dollar and lower yields on the US treasury bonds offset the slightly negative global sentiment on equities. As a result, global signals for the PLN remain neutral. The zloty, however, may still be exposed to internal issues (the MPC dovish message, weak trade) which increase the odds for the PLN to weaken.