Afternoon analysis 03.01.2018

Inflation in Poland below expectations - the probability of higher interest rates before the end of 2018 is decreasing. The dollar pared some of the losses but remained under pressure. ISM data and the publication of "minutes" may increase currency fluctuations, however, the biggest changes can be expected on Friday.

Dollar pared some losses and zloty depreciated

Until 3.00 p.m., during today's session, a slight rebound in the recent dollar's depreciation could be observed, which also translated into the zloty weakening. The USD/PLN pair rose slightly above 3.47 in the morning, although it was below 3.45 only yesterday. Moreover, the EUR/PLN quotations moved from the 4.16 to around 4.165 - 4.17.

The zloty remained strong in relation to the franc, although it is due to the weak global condition of the latter - the CHF/PLN exchange rate fell to around 3.54. The price for the franc was practically the same to that before the peg was released (to the euro) by the Swiss National Bank (SNB) in mid-January 2015.

The Polish Central Statistical Office (GUS) also published today preliminary data on consumer inflation (CPI) in December. In November, it amounted to 2.5% per year, and the market expectations for December indicated a slowdown to 2.1% in relation to December 2016 and 0.3% in relation to November. The GUS data, however, turned out to be lower than consensus - the CPI at the 2% level has been the lowest since August, as well as its monthly increase by 0.2%.

This increases the probability that the following meeting will continue the dovish rhetoric of the Monetary Policy Council. This may reduce the chances of further zloty strengthening - especially if the expected (gradual) dollar appreciation is observed, in connection with fiscal stimulus (lower taxes) or interest rate increases planned by the Federal Reserve.

EUR/USD slightly above 1.20 boundary

Today, the main currency pair quotations (the EUR/USD pair) have been steadily depreciating from almost 1.21 to 1.20. Today two sets of data will be published which could increase the range of dollar fluctuations. At 4:00 p.m., the data of the manufacturing sector ISM index for December in the USA will be published. If the consensus is exceeded (currently 58.2 points) and reaching 60 pts, we can expect a strengthening of the dollar and perhaps a decrease below 1.20 points, which, in turn, could weaken the zloty against the main currencies.

Increasing fluctuations in the dollar can also be expected around the time of the release of the Fed discussions from the last meeting (8.00 p.m.). The so-called "minutes" will probably not be a breakthrough in terms of content. During the last meeting, the level of interest rates was raised, although it was perceived as a 'dovish' increase (two members opted to leave the rates unchanged and there were still no signs that inflationary processes have accelerated).

If the majority of members are concerned about inflation, it may be a negative signal for the dollar and at the same time positive for the zloty. The opposite situation may take place when the tone of the conversations is relatively neutral (according to the previous members' message) and the ISM index will increase significantly. However, the most important data will come on Friday (labour market report from the USA) and then, the most important movements of the dollar can be expected.

Tomorrow's preview

At 10.30 a.m., IHS Markit/CIPS will publish December's data on the PMI index for the UK. After October's unexpected increase of 2 pts. to 55.6 pts. (the highest since March), activity in the sector measured by this index slowed down slightly in the following month (to 53.8 pts.). The median of market expectations assumes growth to 54.1 pts. - however, given the current worse than expected reading of the construction sector PMI index (52.2 vs. 52.8 pts.), these estimates may be too optimistic. If the PMI reading is worse than consensus, the pound may depreciate slightly.

At 2.45 p.m., ADP will present a report on non-farm employment in the USA for December. The market estimates indicate an increase in employment similar to the previous month (192k vs. 190k). This data may give hints of Friday's official reading from the Department of Labor on employment change, although it is not always well correlated. In the event of a significant deviation from the consensus (above 200k or below 150k, more significant fluctuations on the dollar can be expected).

15 minutes later, the weekly data on initial jobless claims will be published. In the previous two weeks, data on the initial jobless claims and data on insured unemployment have failed to meet market expectations. The market consensus assumes 242k (245k a week ago) in the first case and 1,925 million in the second case (1,943 million previously).

One and a half hours later, the IHS Markit PMI data for December will be released. For the US economy, data of an analogous index to ISM is more important. Moreover, this is already the second reading of this index, which further reduces the hypothetical impact of PMI. According to preliminary data from mid-December, it dropped significantly to 52.4 points (the lowest in a year).

The aforementioned publications concerning the US economy may have a relatively limited impact on the dollar individually (the most important publication this week is Friday's labour market report). However, if the overall tone of these three publications is positive, a continuation of the rebounding of the last downward revision of the dollar could be observed.