Zloty in a favourable situation (afternoon analysis 27.11.2018)

The Vice-Chairman of the Federal Reserve did not create a significant impulse for the market. His speech was less mild than expected. The zloty is in good condition despite the relatively strong dollar.

The EUR/USD just above 1.13

The speech by the Vice-Chairman of the Federal Reserve Richard Clarida was an important event today. It was significant because his interview for the CNBC recently caused a major weakening of the dollar. In today's speech in New York, Clarida said that risks to the economy have become more symmetrical and less downwards than even three years ago.

It seems, that this time Clarida's statement was not as dovish as it was before. He supported the Fed's action on a gradual increase in interest rates, also commenting that too slow increase in rates might lead to an increase in inflation and inflation expectations, the reversal of which would be costly. He also suggested that he would prefer to act with the smallest possible Federal Reserve balance sheet, while at the same time achieving the set goals.

The Fed's Vice-Chairman said nothing that would fundamentally change the US central bank's approach to monetary policy. However, his statement in the context of the previous one could be seen as more hawkish than expected. Although it cannot be ruled out that the dollar will depreciate (if the US and China move towards a trade agreement), a sharp decline in its valuation is unlikely.

The EUR/USD quotations fell to around 1.13 in the morning and later the exchange rate remained above this level at a limited fluctuation range. If the dollar does not appreciate significantly and the EUR/USD exchange rate drops below the 1.13 limit, it should also be a good signal for the zloty.

Today, the zloty appreciated slightly in relation to the basic currencies, which is a positive sign taking into account the still relatively strong dollar (the EUR/USD exchange rate is the lowest in nearly two weeks). Positive data from the economy supports the zloty's good condition. The EUR/PLN quotations fell below 4.29 today, to their lower limit from the last 11 days, gaining about 0.2 per cent just after 3:00 p.m. - similarly as in relation to the franc or the dollar. In turn, the pound lost about 0.5% in relation to the zloty today, although its global weakening caused this. The fluctuations of the British currency may still be relatively large until the Brexit issue is resolved.

Tomorrow's preview

At 2:30 p.m., the Bureau of Economic Analysis (BEA) will publish data on US GDP growth pace in the Q3. This will be the second reading. Preliminary data showed that the economy grew by 3.5% y/y, which is also the market consensus for tomorrow's data. However, BEA revisions very often revise upwards with the inflow of more and more data. If the revision was 0.2 percentage points or more, the dollar could be subject to upward pressure, as fears of overheating of the US economy might reappear, and thus the argument for raising interest rates above their neutral level would be reinforced.

At the same time, BEA will also present October's foreign trade balance. The US deficit for the previous four months gradually increased from 64.77 billion USD in May to 76.2 billion USD in September. The median of market expectations indicates a further increase in the deficit to 76.7 billion USD. A further increase in the deficit above this level may lead to a slight weakening of the dollar given the upcoming G20 summit and talks between the US and China, although the final impact of the data on the dollar is likely to be limited.