Waiting for Fed (Daily analysis 24.09.2018)

24.09.2018 13:28|Marcin Lipka

The dollar weakens slightly and main currencies stabilise. There are many threats to the pound due to the unstable political situation and lack of agreement with the EU. The zloty remains stable. The euro exchange rate fluctuates very close to the 4.30 border.

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

  • A lack of macro data may noticeably impact the analyzed currency pairs.

Fed in the limelight

For a good few days now, issues relating to trade between the United States and China have not been affecting the market at all. Therefore, today's rejection of talks by Beijing was also received calmly. Now the ball is in US’ court, from a football point of view. China has imposed duties on virtually all imports from the United States and cancelled the talks, so now the US will have to decide whether, in connection with the presented USTR plan, it will introduce additional tariff restrictions on the remaining imports from China (about 260 billion), covering all imports from the Middle Kingdom with the same trade restrictions. This is, of course, negative news for the sentiment, but it is unclear whether the market will react in any way to it.

Apart from trade-related issues, the Fed's meeting will be important this week. First of all, it will be crucial whether FOMC will maintain the prospect of three interest rate increases (0.75 percentage points in total) in 2019. Currently, the market is estimating half of this movement, which means that there is still space for convergence of investors' position with the expectations of the Federal Reserve. This should help the dollar.

Higher yields on the US Treasury bonds will probably be observed all the time, too. However, this does not necessarily have to be a positive signal for the dollar, especially if one or two-year bonds start to be subject to the same interest rate as 10-year bonds. Then, the market might start to fear that this is a signal of upcoming recession. This could also be an argument for some FOMC members to slow down interest rate increases. Therefore, it would be best for the dollar if the difference between yields at the long and short ends of the yield curve remained positive and preferably continued to grow. Then, even in the case of a good global sentiment, the dollar should not depreciate.

Problems in the UK

After the British Prime Minister May's rejection of the Brexit plan presented in Salzburg last week, British politics were hit by a hurricane. The division of the ruling party in the camp has become even more pronounced, resulting in speculation about early elections or a change in the negotiating strategy.

The left side of the British political scene has also become active, but not much positive information came from it. Labour members are also seriously divided. They are not determined whether to force the scenario of another referendum, or to play for a referendum confirming the hypothetical agreement reached by the parliament, or to "bake the conservatives" and lead to early elections (the last one was in June last year). Generally speaking, the UK is now in political crisis, the consequence of which may be a chaotic Brexit. In this scenario, the pound could seriously depreciate (as much as 0.20-0.30 PLN). The next few days for the pound will also be important. Are the labourist and conservative conventions ending tomorrow and next week likely to lead to a coherent plan in the ruling and opposition parties? If not, the scenario of unstructured Brexit will become more and more likely, and this may have a negative impact on the pound.

Not many movements on zloty

The Polish currency remains stable. There is a minimal increase in movements in the franc or the dollar, but the zloty's condition should be perceived positively in the context of low volatility to the euro.

The zloty's condition can only be threatened by a more pronounced worsening of the global sentiment or a very hawkish message from the FOMC. However, we do not expect the Fed to change its expectations significantly, instead, we expect a moderately positive message from the Federal Reserve for the dollar. Therefore, the dollar may have slight support this week, but it is not strong enough to have a noticeable impact on the overall valuation of the zloty.


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