The minutes from the last ECB Governing Council meeting, as well as weaker than expected macroeconomic data from the US, once again weaken the US currency noticeably, with the EUR/USD quotations at the highest level since Monday. The zloty pared some of the losses incurred over the past few days due to the dollar weakening.
EUR/USD again above 1.20
For the majority of the day, the main currency quotations were relatively calm. The fluctuation range was limited, the EUR/USD was traded between 1.193 and 1.195. However, at 1.30 a.m., the European Central Bank (ECB) published a record of the discussion (minutes) from the December Governing Council meeting, which caused a significant increase in euro valuation, the EUR/USD quotations increased rapidly from 1.193 to 1.203.
Although the minutes were, as expected, relatively dovish (despite the fact that the underlying inflation is still subdued), the market's attention could have been drawn to the part in which it was stated that the Council's communication should evolve. It was discussed that this should happen at the beginning of next year. This may be connected with the QE tapering at the end of this year (which is expected to last until the end of September).
The reaction to this information, may seem to be a bit exaggerated, an hour later data was published that further weakened the dollar. December's producer inflation (PPI) in the USA amounted to 2.6% per year, although 3% was expected. Excluding energy and food prices, this index fell from 2.4% to 2.3% (in at least three months). Weekly data on initial jobless claims also failed to meet expectations with the number of submitted claims increasing to 261k the highest level since the end of September, when data was disrupted (most likely overstated) by hurricanes.
The dollar may be under pressure for the rest of the day, given the hard data that can support the argument to sell. However, investor attention may gradually shift towards the consumer inflation publication scheduled for tomorrow. A better reading than expected could cause the dollar to pare today's losses.
The weak dollar's condition is usually really beneficial for currencies of emerging countries, including the zloty. Its weakening caused a drop in the USD/PLN exchange rate from 3.50 to 3.47, although the strong EUR/PLN exchange rate was maintained close to yesterday's closing (approx. 4.175). The zloty appreciated about 0.5% in relation to the pound and the franc. Small changes were observed only in relation to the Hungarian forint, which could suggest that a better condition on the zloty is generated by external factors.
The calendar of scheduled events is practically empty, therefore, the zloty condition will depend once again on dollar behaviour. If it does not pare its losses, the zloty may remain at the level of the current quotations in relation to the main currencies.
On Friday, the most important publication for this week is likely to be published. At 2:30 p.m., the Bureau of Labour Statistics (BLS) in the USA will present December's Consumer Inflation data (CPI). Currently, the market consensus assumes a slight drop to 2.2% per year. Although this reading may eventually turn out to be slightly higher (due to a rapid increase in the price of oil), data on core inflation (excluding energy and food prices) will be much more important.
From May to November, the core inflation remained at 1.7% YOY level, except October, when it amounted to 1.8%. It is expected to rise to this level in December as well. It seems that an increase of just 0.1 percentage points may result in a significant dollar appreciation.
Inflation data will be the most important event and will probably have the biggest impact on the dollar. However, if it proves to be in line with consensus, the market's attention may be diverted towards the US retail sales data for December, which will be published at the same time.
In the previous three months, retail sales positively surprised by exceeding market consensus with an increase in November by 0.8% per month and core index (excluding car sales) increase by 1%. In December, the rate is expected to slow to 0.4% in both cases (compared to the previous month).
Therefore, an increase in USD fluctuations around the time of both publications can be expected. A positive result of the above data could be bad news for the zloty, which is sensitive to the strengthening of the US currency and as a result, increased pressure on the zloty can be observed.