Afternoon analysis 12.12.2017

Core inflation in Poland, excluding energy and food prices, was in line with expectations and remained below 1%. The US currency appreciated after producer inflation (PPI) was published, the prices for the US producers rose at the fastest pace in November in almost 6 years.

Stable zloty

At 2.00 p.m., the National Bank of Poland (NBP) published November's data on core inflation in the Polish economy. It was in line with market expectations, core inflation amounted to 0.9% per year. This is an increase by 0.1 percentage points compared to October. On the other hand, NBP data confirmed that November inflation (main reading) at the 2.5% level was mainly a result of continued increases in food and fuel prices (due to the appreciation of crude oil prices).

This publication was neutral for the zloty's quotation, and its valuation in relation to the main currencies remained close to yesterday's levels. However, this week significant fluctuations in the currency market can be expected, including increased zloty activity, following the inflation publication, interest rate increases in the US and statements by the ECB and the BoE on monetary policy.

Dollar appreciated after positive inflation data

Before 3.00 p.m., a strengthening of the dollar was observed. The EUR/USD quotations fell around 1.174 level after the Bureau of Labor Statistics (BLS) published higher than expected producer inflation (PPI) data for November in the USA. It increased to 3.1% per year, therefore, to the highest level since the beginning of 2012 and 0.2 percentage points above expectations. The core reading (excluding energy prices) turned out to be slightly higher (by 0.1 percentage points), which in November amounted to 2.4%. The difference between these two sets of data is mainly caused by the increase in fuel prices in the USA. In November, they were 15.8% higher than in the previous year.

Exceeding expectations data also caused an increase in the valuation of the dollar expressed in the Polish currency, which around 3.00 p.m. was close to 3.58 PLN, the upper limit of the last three weeks. However, the dollar's appreciation is likely to be limited. The PPI data is rather secondary in terms of their impact on the US currency. Moreover, due to tomorrow's consumer inflation data and the decision on interest rates in the US, the probability of significant US dollar movements during today's session is limited.

Tomorrow's preview

At 10.30 a.m., the Office for National Statistics (ONS) will publish data from the British labour market. Data on the unemployment rate, the rate of employed in the economy and change of average wage will be published. Two of these first pieces of data have surprised positively in recent months, while market attention may be concentrated on the latter. In the case of the United Kingdom, inflation in recent months has been seen that has surpassed wage growth pace, which has meant that real British wages have been falling.

The market consensus assumes that the wage growth pace will accelerate from 2.2% to 2.5% in October (on an annual basis). The reading clearly below the median of expectations, around the 2.2% level, could suggest lower real consumption (prices are growing by 3.1% YOY) and consequently indicate a probability of lower than expected economic growth pace. In such a scenario, the pound could depreciate.

Half an hour later Eurostat will publish October's data on industrial production in the eurozone. In the previous three months, activity in this sector was positively surprising, exceeding market expectations. From July to September, production growth in each of these months has been above 3% annually (positive despite the low base in 2016). The market expectations indicate an increase in production by 3.5% in October (just 0.8% a year before). If the consensus is exceeded again, the euro could gain somewhat, although the market's focus is likely to be on inflation data and the Federal Reserve (Fed) in the USA.

At 2.30 p.m., the Bureau Labour Statistics (BLS) will present consumer inflation (CPI) data in the US economy. Although PCE inflation (which the Fed takes into account in its projections) seems to be relatively more important in the case of the USA, the CPI may give indications to future trends of price changes in the economy. The consensus assumes that the main indicator will increase by 0.2 percentage points up to 2.2% per year and the core reading (excluding energy and food prices) will be maintained at 1.8%. It seems that the change by 0.1 percentage points of the latter may cause more significant movements on the dollar.

At 8.00 p.m., the Fed's decision on the interest rate level will be published. The increase is particularly closed and probably already fully valuated by the market. The statement and press conference by Janet Yellen, the Fed President, will be more important. Inflation in the US has recently remained below previous estimates and therefore, the market probability of further rate hikes in 2018 remained below the FOMC consensus. It is also unlikely that the Federal Reserve would significantly modify its statement. In the light of the macroeconomic projections publication or potential reference to the planned fiscal changes in the USA, an increased activity on the dollar and on the global market could be observed.