Zloty under light pressure (Daily analysis 28.02.2018)

The zloty dropped mildly after yesterday's testimony from Powell before the US Congress, while the dollar is the most expensive in relation to the euro since mid-January.

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

• 14:30: US GDP growth rate in the fourth quarter (estimates: 2.5% m/m, previously 2.6%).

Stronger dollar

Federal Reserve Chairman Jerome Powell’s testimony before the US Congress yesterday, initiated the dollar strengthening. The US currency value, in relation to the euro, has risen to the highest level since mid-January as it was 1.22 USD for one euro this morning. Yesterday we observed a sale on the US stock and government bond market - the main stock indices lost over 1%, the debt securities sale pushed their yields around last peaks.

The market has interpreted Powell's testimony as increasing the likelihood of four interest rate hikes this year. Interestingly, it did not directly refer to the amount of interest rates, but to the necessity of their gradual lifting in order to avoid an economic overheating. The new Fed chairman is optimistic of the economy. This view of its strength and the expected continued strong growth has raised concerns of some part of the market about the possible faster monetary tightening.

Powell himself, however, mentioned that recent market reactions were exaggerated, which we could also witness yesterday. While dollar appreciation is justified from a fundamental point of view, the violent market reaction might have been an example of what the new Fed chief mentioned.

The deterioration of sentiment on the market negatively affected the zloty’s valuation in relation to main currencies. The dollar reached the price of about 3.42 PLN which is 0.04 PLN more than yesterday morning. The euro was about 0.01 PLN more expensive (about 4.18 PLN). Although the main Asian stock indices were also clearly depreciating and the European ones started the day on the downsides, losses were made up every hour.

The improvement in sentiment on the stock and bond market may contribute to the zloty’s improvement later in the day. The dollar will probably remain relatively strong, so chances for a fall below 3.40 PLN are limited. The euro’s value, however, may fall back to 4.17 PLN if we observe an improvement in the market sentiment. In the afternoon, we will see the US GDP growth data in the fourth quarter. This is however the third reading and significant deviations are likely making their impact likely limited.