Powell brings dollar's life back (Afternoon analysis 27.08.2020)

The dollar fluctuation range increased strongly after the Fed chair's speech. Further positive macroeconomic data from the US may raise expectations for a solid labour market report next Friday. The zloty is stabilising after the increase in volatility: the USD/PLN pair is approx. 3.73, and the EUR/PLN exchange rate is about 4.41 in the afternoon.

Instead of the target inflation, average inflation

In the afternoon, the Chair of the Federal Reserve (Fed), Jerome Powell, spoke at the economic conference, which traditionally was held in Jackson Hole, Wyoming. As expected, Powell announced that the Fed would aim to keep average inflation at 2% instead of a fixed inflation target.

In practice, this may mean that the US central bank agrees to inflation above 2% to make up for periods when it was below this level. The change in the approach to inflation also means that the Federal Reserve will be a little more passive when it comes to responding to inflation, rather than changing interest rates as a precautionary measure.

As expected, Powell's statement influenced the exchange rates. The EUR/USD pair left the narrow fluctuation range we have seen since last Friday. The EUR/USD exchange rate rose from 1.18 to 1.19, after which it fell back to 1.18 (about 1.1790) at a rapid pace.

The slight increase in the dollar is also due to an increase in the yield of US Treasury bonds. Yields on bonds with a 10-year maturity increased to about 0.7440%, the highest level since mid-June. On the other hand, the yield of bonds maturing within 2 years has not changed, which also limits the growth potential for the dollar today. Discounting today's decision of the Federal Reserve by the market may take more time, but the basic information for investors remains unchanged: interest rates will remain around zero (0-0.25% to be precise) in the US for a long time.

Real estate boom

This low level of interest rates helps the US real estate market, which has grown strongly over recent months, exceeding expectations almost every time. It was no different today, when, according to NAR data, the number of houses for sale increased on a monthly basis by 5.9% in July, although a slightly more subdued growth of 2% was expected, after the strong rebound of 15.8% observed in June. There was also a solid annual growth of 15.4%, which was also the highest since October 2012.

Today, the second reading of GDP for the Q2 was also published. There was a minimal improvement compared to the first one: the US economy contracted by 31.7% q/q (annualised), 0.8% less than expected. In turn, according to the Federal Reserve, Kansas' industrial activity index rose to its highest level since November 2018, well above market expectations - 14 pts. compared to 5 pts. expected. The weekly report on the number of initial jobless claims, which amounted to 1 million last week (down by 100 thousand), was in line with expectations.

The zloty with limited reaction to information from the US

The zloty's volatility range increased in the afternoon during Jerome Powell's speech, but fundamentally its valuation against the main currencies has not changed. The EUR/PLN exchange rate fluctuations today, similarly to yesterday, were in the range of about 4.39-4.42. A slightly larger range was observed in the case of the USD/PLN exchange rate, which moved between 3.70 and 3.75.

After the US currency's fluctuations stabilised on the broader market, the dollar's exchange rate to the zloty oscillated around 3.73 PLN in the afternoon. This is likely to change with the market discounting, which will mean an average inflation target set by the Fed. However, further significant changes can already be expected next Friday.