Pressure evoked by Fed (Daily analysis 22.02.2018)

Hawkish Fed supported the dollar and the yields on the US Treasury bonds. Economic growth in the Islands has been the slowest for more than 5 years. The zloty clearly lost its value in the morning, but before the midday, the depreciation slightly decreased. The zloty remained sensitive to external factors.

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

• 1:30 p.m.: Minutes from the recent ECB meeting,
• 2:00 p.m.: Minutes from the last MPC meeting.

Relatively hawkish Fed

Yesterday there were speculations how to evaluate the minutes from the Federal Reserve. Taking into account only the headline information on stronger growth that could increase the chances of further increases or on the probability of accelerating economic growth connected with the tax cuts, it was difficult to estimate the overall atmosphere within the Committee. Statements presented in headlines could also have been taken out of context.

However, when investors read the whole minutes, they noticed that the Federal Reserve was more and more convinced to tighten the monetary policy. There were many references to strong economic growth, and growth in employment, household spending and corporate investment. Attention was also drawn to further growth of households' assets (because of records on share market) and high levels of consumer sentiment.

The fact that the household savings rate fell to its lowest level since 2005, which may indicate that the spending is too high in relation to income and is also an argument for monetary tightening, may indicate the more hawkish tone of Fed.

The pace of inflation reaching the target or wages increases are still unknown, but these issues were less present than in the previous minutes. Moreover, a discussion among Fed economists (minutes are divided into two parts - discussions of economists and members of monetary authorities) concerning inflation seems to be important. It was dominated by the view that its earlier, surprising drops were of a temporary nature.

The overall message from the minutes presents a greater persuasion of the Fed members for rate hikes. Probably most of the Fed members may support a scenario of 25 basis points increases in each quarter of 2018. This would mean four increases this year.

In the end, minutes brought significant changes. An increase in the dollar's value was observed as well as the setting new, long-term records of the entire yield curve of the US Treasury bonds. Share markets dropped sharply at the end of the trading session due to a higher chance of tightening monetary policy faster than expected. This scenario is also positive for the dollar.

The weakest GDP in 5 years

In the morning, ONS published another UK reading on GDP estimates for the Q4 of 2017. It turned out that the British economy was growing at a pace of 1.4% YOY. This is by 0.1 percentage points below the forecast, as well as the weakest result for over 5 years.

Only data on investments was positive. Although this is a big plus, due to the real decline in wages in the Islands the consumption is weak (without consumption will be difficult to improve poor results). Net exports were also clearly negative (0.8 percentage points), which may mean that the effect of the weaker pound expires, which supported GDP since the Q4 of 2016. This also shows that the UK's economy may still remain unbalanced externally (clear current account deficit), which is not positive for the pound.

Zloty clearly weaker

Our forecasts of yesterday's minutes from Fed being hawkish were confirmed (details in the previous paragraphs). Strong growth on the yields of the US Treasury bonds, combined with declines on the US market and a rise in the dollar, put a clear pressure on the zloty. In the morning, the EUR/PLN pair was quoted above 4.1850 and the USD exceeded 3.41.

Around midday, the situation has stabilised slightly, perhaps due to strong demand for the shares of national bonds (the demand was more than three times higher than the supply). In the following hours, minutes from the ECB will be important, although their interpretation may be quite chaotic and not necessarily be proper (as 6 weeks ago). Therefore, the global sentiment will determine the rhythm of the zloty's quotations. Since it is not particularly good, the risk of further weakening the Polish currency remains increased.