Afternoon analysis 12.10.2017

Better than expected macroeconomic data from the US economy supports the dollar, but its impact may be limited. The impasse in the negotiations on the bill for the Brexit has exerted pressure on the pound. The zloty may depreciate a little with the appreciating dollar, but the likelihood of big changes is limited.

Good data on the US

Despite the fact that markets' attention is primarily focused tomorrow's data on the consumer inflation (CPI), and today's better than expected data from the US economy has been released, which may strengthen the dollar in the following hours. Producer inflation (PPI), both the headline index and the core index (excluding energy and food prices), increased in September to the highest levels in five years, by 2.6% and 2.2% respectively compared to the same month of the previous year.

Significantly better than expected turned out to be data on initial jobless claims. The number of submitted jobless claims in the previous week amounted to 243k, 8k below the market expectations and 15k less than the previous week. The number of already insured unemployment was even better - it turned out to be lower than consensus by 46k and reached the value of 1.889 million people, the least since December 29th, 1973.

However, it should be noted that this data was significantly affected by hurricanes, which hit some of the US states in September. Therefore, as in the case of October's report on the labour market in the US, the market participants may be cautious about them. The dollar has gradually appreciated since the morning hours. The EUR/USD quotations, after reaching the level of approx. 1.1880 (the highest in 2.5 weeks), has been gradually decreasing to the approx. 1.1850 level. Later on, this movement may be continued, although tomorrow's data publication on inflation may cause more serious reshuffles.

The pound has been under pressure since the morning hours, but around midday, there has been its clear depreciation. Michael Barnier, the head of the European Union's Brexit negotiators, said that the UK's talks on Brexit's bill had reached the impasse. Around 3.00 p.m., the pound was losing slightly more than 0.5% in relation to the dollar. As the UK currency may be supported by expected interest rate increase, the political factors (both internal and external) can exert significant pressure on it in the short term.

Inflation in line with expectations

Today, the Polish Central Statistical Office (GUS) released detailed information on September's inflation. The preliminary estimate of 2.2% per year, was confirmed by the final data. This was the highest inflation reading since February, therefore, the question was whether this was mainly due to rising energy and food prices or other factors.

According to today's GUS data, average food prices increased by 5.3% compared to September 2016, and fuel prices by 3.6%. Therefore, most of the general inflation increase was generated by these two factors, which will probably not support the zloty in a clear way (tomorrow, core inflation data will be published by the National Bank of Poland).

The zloty's trading was dependent to a greater extent on external factors by another day. The pound's depreciation caused that the price of one British currency unit fell to the lowest level in a month (approx. 4.73 PLN). On the other hand, a slightly stronger globally dollar increased the USD/PLN exchange rate to 3.61, although in the morning it was 3.5950.

The appreciating dollar (combined with the weakening expectations for a strong core inflation reading in Poland) may be a factor that in the following hours will slightly weaken the zloty. However, the probability of deeper corrections is limited today. Significant changes in the zloty value are possible around tomorrow's publication time on consumer inflation data in the US (2:30 p.m.).

Tomorrow's review

A set of data will come to the market tomorrow, which may have a significant impact on the dollar's valuation, and indirectly also on other currencies. At 2.30 p.m., The Bureau of Labor Statistics (BLS) in the US will publish September's data on consumer inflation (CPI). Last month's data turned out to be by 0.1 percentage points higher than expected for both the headline index and the core one (excluding energy and food prices).

The median of market expectations indicates inflation of 2.3% compared to the same month last year, against 1.9% in August. However, the core inflation seems to be more significant, as it better reflects the consumer prices' trends in the economy. It has, in turn, amounted to 1.7% (YOY) for the previous four months, therefore reaching its the lowest level in two years.Now, the market consensus assumes a growth of 1.8%.

At the same time, the Census Office will present September's data on retail sales in the US. August's reading failed the market expectations: total retail sales fell by 0.2% per month (an increase of 0.1% was expected). Its core reading, i.e. excluding the characterised by relatively volatile vehicles' sale, although it grew by 0.2%, it also turned out to be worse than expected (0.5%). The market consensus points to an increase in retail sales in September by 1.7% per month and a 0.3% increase in the core index.

Data on inflation seems to be relatively more important. A positive reading (especially in the case of the core index) could give the dollar more arguments for appreciation, due to the chance that it could somewhat lighten the fears of continued low inflation in the economy. In the context of the Federal Reserve hawkish statement, which has not withdrawn from its earlier announcements on monetary tightening, the US currency could be given further stimulus.

Before a week ago, after a relatively good report from the labour market, the dollar has not gained, due to i.a. fears of disturbing it with September hurricanes. The next week in a row, however, could break the dollar's weakness and cause its value to increase.