Waiting for Fed (Afternoon analysis 20.03.2019)

The market anticipates an evening statement and a press conference of the Federal Reserve. Uncertainty about the final tone of the message is high, so there may also be significant fluctuations in the dollar - both during this evening and tomorrow. Another set of positive data support the zloty.

Might Fed be not dovish enough?

The main events of today are the Fed's statement and press conference with the participation of its President, Jerome Powell at 7:00 p.m. and 7:30 p.m. respectively. The currency market was relatively calm, but in the evening hours, it is likely to be overtaken by significant fluctuations. The EUR/USD pair oscillated around 1.1350, while the market is awaiting the message from the Fed's monetary committee.

The chances that it will be hawkish are practically zero. The March meeting will be interesting as the Fed has changed its attitude to monetary tightening by 180 degrees in recent months, stressing at every step the "patience" in any further steps. Macroeconomic projections, which include inflation and GDP growth pace, will also be published today. Taking into account external risks (Brexit, negotiations with China, global economic slowdown), the GDP growth pace may even be revised downward. This would be a negative signal for the dollar.

It should be noted, that the Fed as the main factor for the pause in the monetary tightening mentioned the collapse in the equity market. The main US market indexes have already managed to pare all the losses since the December fall. This element may also be highlighted in the statement and during Powell's press conference. Given the recent pressure on the dollar and strong equity increases, market participants may be expecting an even more dovish message from the Fed and a suggestion that there will be no rate hikes this year. However, this statement may turn out to be less mild than the market expects due to improved sentiment on the equity market. This could even increase the dollar's value. Whatever the message from the Federal Reserve will ultimately be, the uncertainty is so great that we can expect significant fluctuations in the dollar in the evening and the next day.

Even if we observe a significant dollar appreciation, the zloty basket should remain stable, and the main changes should be limited to the USD/PLN pair. A set of positive economic data that were published recently, including industrial production, current account, wage growth and sentiment records on households, protects the Polish currency against a possible deeper depreciation. This afternoon, the EUR/PLN pair fell to 4.28, the lowest level since February 4th this year. The chances for greater changes seems to be limited, and given both the positive and negative Fed's statement to the dollar, the EUR/PLN exchange rate should be in the range of about 4.26-4.30.

Tomorrow's preview

At 10:00 a.m., the Polish Central Statistical Office (GUS) will publish data on retail sales. The zloty is under impact from external factors. The most important seem to be the actions of central banks, especially the ECB and the Federal Reserve. However, the zloty is supported by the recent positive readings from the Polish economy. The median of market expectations indicates an annual growth in sales of 6.9%. Another solid reading could support the Polish currency even more, although on the other hand the potential appreciation is limited due to the lack of prospects for interest rate increases in Poland.

The pound is currently sensitive to reports on Brexit, but tomorrow's events related to the Bank of England (BoE) at 1:00 p.m. may further increase the already large fluctuation range. A change in interest rates after the BoE Monetary Committee meeting is practically excluded. The Bank will continue to wait for a solution to the matter of leaving the EU with interest rate changes. However, this issue remains unresolved, and uncertainty has even increased in recent days. This could potentially lead to a post-session message, which could increase supply pressure on the pound in the short term.