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Pressure on lower interest rates in the USA (Afternoon analysis 17.12.2018)

17 Dec 2018 16:52|Bartosz Grejner

On Wednesday, the Federal Reserve will definitely raise interest rates, which the US President does not like. The dollar is slightly weaker but within a narrow fluctuation range. Events on the equity market have only a small impact on the currency market. Core inflation in Poland is in line with expectations.

Will the dollar appreciate on Wednesday?

There are two more days until the decision on interest rates in the USA (a practically certain 0.25 pts. increase), and the US President Donald Trump has already warmed up the atmosphere. In his Twitter post this afternoon, he suggests to the Federal Reserve (Fed) not to raise interest rates, mentioning a strong dollar and low inflation as the reasons.

This is not the first time that Trump is putting pressure on the Fed, so the response of the market this time was very limited. On Wednesday, there will be a press conference with Jerome Powell, head of the Fed. He will have the chance to emphasise the independence of the US central bank, which should support the dollar, regardless of new macroeconomic projections.

The main currency pair's quotations, i.e. euro/dollar, were slightly (about 0.3%) above Friday's level, but they were within a very narrow fluctuation range. Wednesday's events (publications and a press conference of the Fed) may provide the dollar with a trigger that will pull it out of its current stagnation.

Depending on the movement (slightly higher chances of dollar appreciation), it will have a significant impact on the whole zloty basket, not only for the USD/PLN pair. Especially if the US currency appreciates significantly, the zloty could come under great pressure. Today, however, the zloty's quotations were relatively stable - a slight weakening of the dollar translated into even slight increases in the zloty's value in relation to the basic currencies. Core inflation, published by the National Bank of Poland, did not disappoint either. The 0.7% increase in prices, excluding energy and food, turned out to be in line with the market consensus. This will support the zloty's stabilisation until the end of the day.

In the afternoon, there are no major events planned or macroeconomic data published, which increases the probability that the main currencies will continue to be traded in limited fluctuation ranges. During the European sessions, we observed drops in the main indexes, which were further deepened as the main US markets' trading opened. The 30 largest companies index Dow Jones fell to its lowest level since May, and the technology company index Nasdaq has fallen to its lowest level since April, just like S&P 500.

Recently, we have been observing a slightly greater separation of events on the equity and currency markets. Geopolitical risks and trading tensions significantly increase the volatility of the equity market, but the final impact of these events is difficult to translate into currencies. As a result, the zloty is also more resistant to equity market depreciation, and we should not observe its significant weakening.

Tomorrow's preview

Tuesday should be another relatively peaceful day on the currency market. The calendar of important macroeconomic publications is practically empty, and the market should focus on Wednesday's events related to the Federal Reserve.

The zloty is currently in good condition, although this is mainly due to the lack of dollar appreciation. At 10:00 a.m. the Polish Central Statistical Office (GUS) will publish data on average wages and employment in the enterprise sector. The median of market expectations indicates that they grew at a pace of 7.2 and 3.0 per cent per year, respectively.

The high rate of wage growth has been maintained in Poland for a long time - the last time it fell below 6% (on a yearly basis) in mid-2017. In theory, the high pace of wage growth should support the return of inflation to its target, although other factors are currently influencing the relatively low inflation rate. However, this is a process we are observing not only in Poland but also in the eurozone. The Monetary Policy Council is still very keen to raise interest rates and one reading by the GUS will not change much in this respect. However, it may give some support to the zloty in case of dollar appreciation.

17 Dec 2018 16:52|Bartosz Grejner

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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