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Worse eurozone's sentiment (Daily analysis 22.03.2018)

22 Mar 2018 12:23|Marcin Lipka

Weaker dollar after the Jerome Powell press conference (President of Fed). Worse data from the eurozone as PMI and Ifo indexes close to yearly lows. Fed that appeared less hawkish than expected, supports the zloty, but it is mainly visible on the USD/PLN pair. The euro remains in the range of 4.22-4.23 PLN.

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

  • 1.00 p.m.: Decision on interest rates in the UK (estimates: interest rates without changes at 0.50% level).

Powell more dovish than hawkish

Apart from Jerome Powell's press conference, yesterday's Fed statement was relatively hawkish. The number of interest rate rises increased from two to three in 2019. For the median of monetary tightening expectations for 2018 to be shifted from 0.75 percentage points to 1 percentage point, one more vote from the FOMC member was needed.

Additionally, the macroeconomic forecasts assume that the growth in Q4 will amount to 2.7% year-on-year, while the unemployment rate will reach 3.6% at the end of 2019, i.e. by 0.9 percentage point lower than its natural level. This shows that the chances of accelerating the monetary tightening in the coming quarters are high.

The message itself can also be perceived as hawkish rather than dovish, especially in the case of forecasts. In the document, we can find the statement that the economic outlook has improved in recent months. Between the conference with the publication of data and the press conference, a more steep yield curve could be observed, which indicated the relatively hawkish message from the Fed.

The situation has changed during the press conference. Jerome Powell reduced the impact of macroeconomic projections and did not see the threat of higher inflationary pressures. He also reduced the risks of macroeconomic imbalances (e.g. the real estate market) raised by some FOMC members. As a result, one could get the impression that Powell is more dovish than hawkish. This has led to a significant dollar depreciation, reaching even 1.2380 per EUR/USD pair this morning.

Downward trend on the euro

The high EUR/USD quotations did not last long due to much worse than expected and close to yearly lows readings of PMI indexes from the eurozone and German Ifo. This may reduce expectations for relatively rapid rate hikes (before mid 2019) by the ECB and, at the same time, depreciate the euro.

The IHS Markit's preliminary PMI index for the eurozone, which concerns services and industry, fell to 55.3 pts, the lowest level in 14 months. The industry's sub-index decreased by as much as 3.5 percentage points to 56.1 percentage points. In summary of the data, the weather was partly too bad, but at the same time it was noted that "the loss of a moment (i.e. growth) from the strong beginning of the year was quite dramatic."

Germany's leading economic index also failed to meet expectations. Ifo, which measures the climate of entrepreneurs abroad, has fallen to its lowest level in 11 months and reached 114.7 points. Ifo respondents pointed out that the worse sentiment in the economy is a result of protectionist risks. Around midday, the EUR/USD pair was close to 1.2320, 60 pips lower than in the morning.

The Bank of England meeting. Slightly stronger zloty

At 1.00 p.m., the Bank of England will publish a statement from the March meeting. Interest rates are unlikely to change, but minutes may suggest increasing chances for monetary tightening in May. That could support the pound today.

Drops on the dollar after the Fed meeting and weaker data from the eurozone suggesting lower probability for monetary tightening by the ECB supported the zloty slightly. However, the EUR/PLN quotations remained in the range of 4.22-4.23. In the longer term, if the slowdown in the eurozone were to occur, it would be difficult to predict the impact of the crisis on the zloty. Today's data is not favourable for the zloty, as it may cause an outflow of capital from emerging economies. Overall, therefore, the Polish currency should remain under pressure.


22 Mar 2018 12:23|Marcin Lipka

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.

See also:

21 Mar 2018 14:58

Zloty under pressure (Afternoon analysis 21.03.2018)

21 Mar 2018 9:14

Market waits for Fed (Daily analysis 21.03.2018)

20 Mar 2018 15:42

The zloty remains weak (Afternoon analysis 20.03.2018)

20 Mar 2018 12:24

Weak data from Germany (Daily analysis 20.03.2018)

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