Slightly weaker dollar (Daily analysis 16.07.2018)

The dollar weakens in the global market. Is the market afraid of Jerome Powell speech to Congress this week? The zloty benefits from a relatively good sentiment and speculation on monetary policy in the USA. The EUR/PLN pair may fall below the 4.30 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.: Retail sales in the USA (estimates: 0.5% month-on-month excluding fuels and cars 0.4% month-on-month).

Dovish statement from the Fed? The market speculates

The dollar weakens as the week started. The reason for it is difficult to explain, but it is possible that the market starts to play for more dovish Fed. Why such speculations among investors? The market can expect that in the speech planned this week by the head of the Fed, Jerome Powell (Tuesday in the Senate and Wednesday in the House of Representatives) dovish suggestions may be present.

The hearings of the Chairman of the Federal Reserve in Congress are often marked by the current political situation. The members of the two committees are also representatives of Congress. Therefore, the questions may be strongly marked by the current tensions in the US politics. Many Democrats and Republicans are concerned about foreign trade and the hypothetical customs war between the US and other leading economies.

The market can expect Jerome Powell to take part in the discussion, opting for the standard approach where, in the case of foreign trade restrictions, the economic situation will weaken, which in turn will mean fewer stimulus for interest rate increases. On the other hand, the fact that the market is playing for such a scenario does not mean that it will come true.

Last week's Powell interview for the public radio showed no strong trade concern. In addition, the real impact of economic protectionism and its scale is a big question mark. Therefore, it may be misleading for the market to expect Powell to sound dovish because of the potential expansion of the trade dispute.

In addition, the situation in the mid-term (the next few months) has remained fundamentally the same. The GDP growth pace in the US will continue to stay strong compared to other countries. The difference between interest rates in the US and other leading economies is likely to increase. This should support the dollar. In contrast, in the case of a sharp drop in market sentiment, the dollar should also be supported. Thus, it seems that the dollar weakening may be short-term (in days) and doesn't necessarily mean a flight from the dollar.

Zloty benefits from weaker dollar

Despite that weaker dollar seems to be temporary and a bit of a stretch (details in the previous paragraphs), it obviously has an impact on other assets, including the zloty. As a result, a drop in EUR/PLN to around 4.30 is observed. It is also possible that in the first part of the week the rate will go below in red, around 4.30 limit.

In the morning, NBP published the entire Inflation Report (on Wednesday only an outline was published). In the monetary policy context, a lower inflation path and GDP can be seen compared to the publication in March. This probably supports the MPC to keep interest rates unchanged, so it is more negative than positive information for the zloty, but the impact of this data is very limited.