Weaker dollar (Daily analysis 28.12.2018)

Positive behaviour of the shares does not help the dollar for now but rather strengthens the yen or the euro. Inflation from Germany may be below market expectations. The zloty is slightly weaker than the euro, but we should not move away from 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.

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

Again high volatility on the US market

Thursday was another day with strong movements on the US shares. The core index in the USA lost less than 3% two hours before closing. However, the sentiment suddenly reversed, and the serious loss turned into an almost 1% increase.

However, the bond market reacted only in a limited way to this shot of optimism. Although yields increased slightly this evening, they are falling during this session, despite the increase in S&P 500 futures contracts. Currently, the market does not value any increase in interest rates, and at the beginning of 2020 quotations even indicate a better chance of easing the monetary policy than a tightening of it. Therefore, the euro benefits from a better sentiment and the weakness of the dollar is also used by the yen and the franc, which increase against the dollar.

It is possible that the market exaggerated this pessimism on the economic situation across the ocean in the following months. Moreover, the total lack of valuation of monetary policy tightening also seems unrealistic. As a result, pessimism on the dollar may be a bit too soon.

The present week is characterised by a small amount of economic data from the eurozone. Today, inflation readings from Germany may be important. Taking into account publications from individual federal states, it seems that at 2:00 p.m. we may have lower or equal to the consensus inflation from the whole country (expectations published by Bloomberg are 1.9% year-on-year and 0.3% month-on-month). However, there is little chance that the estimates will be exceeded, whether on a monthly or annual basis.

Looking also at the detailed data from the State of Hesse, there is no clear evidence of any pressure to increase costs, given the elements of core inflation or service related inflation. The annual price change in December was 0.9%, excluding energy and seasonal goods, compared to 1.2% in November. Services inflation remained at the level of 1.2%, which is similar to that of the previous months. In general, the data published so far from Germany does not show any pressure on the ECB to raise interest rates earlier than expected.

The following hours on the broader market may be under changes in shares and bonds. If the bonds react with increases in yields together with continued optimism on the market, then we should see a strengthening of the dollar. Otherwise, the end of the year will be marked by drops in the US currency valuation.

Limited changes on the zloty

Similar to previous days, the zloty is relatively stable. Although EUR/PLN is testing 4.30 level, it is related to the euro strengthening rather than to clear drops in the zloty. Also, the scale of movements is not large, and all the time the baseline scenario remains that the EUR/PLN will be traded around 4.30.

In the evening, the dollar may be slightly weaker if it turns out that hypothetical US equity increases are not accompanied by market interest rates and the market still does not value any monetary policy changes by the Federal Reserve over the next 12 months. The dollar may also be adversely affected by a lack of agreement between Democrats and Republicans in the context of the budget. From the new year, we will have a new formation of the Congress (an advantage of Democrats in the House of Representatives). This, apart from the budget itself, may give rise more tension between the Congress and the White House, not only in the context of the budget. There is also a risk for the dollar, although much less important than concerns about the economic situation or the lack of interest rate increases by the Fed.