Afternoon analysis 15.01.2017

According to final data on consumer inflation in Poland (CPI) the prices of food and cheap clothes increased the most. However, macroeconomic data had limited impact on the zloty. The EUR/USD reached the highest and the USD/PLN amounted to the lowest exchange rate since December 2014 due to pressure on the dollar.

Inflation in line with expectations

Preliminary estimates on consumer inflation (CPI) in Poland in December indicated a drop from 2.5% to 2% per year, which was 0.1 percentage points below market consensus. Today, the Polish Central Statistical Office (GUS) final data pointed to consumer inflation at 2.1% in annual terms (0.2% compared to the previous month).

Once again, a substantial increase in food prices was observed - in December they rose by 5.8% compared to the same month last year (and 0.6% month-on-month). A noticeable increase in restaurants and hotels was also recorded by Polish citizens (by 2.8% year-on-year), additionally, prices of energy (by 2.6% year-on-year) went up. On the other hand, a clear depreciation in clothing and footwear can be observed, with average prices falling by 4.8% per year and 1.4% per month.

The data on Poland's current account in November were published today. A surplus was recorded for the second consecutive month (first time in 1.5 years). However, the positive account result of 233 million EUR was clearly lower than market expectations (693 million EUR) and more than half of October’s result (575 million EUR).

The aforementioned publications have not influenced the zloty. External factors (especially the strongly depreciated dollar) still have been exerting a greater impact on the condition of the Polish currency. The euro's exchange rate in relation to the dollar (EUR/USD) has reached the somewhat higher level in over three years, increasing to about 1.23. As a result, the dollar in relation to the zloty was the cheapest (compared to the analogical period), falling by 0.12 PLN (approx. 3.4%) within less than a week to a level below 3.40 PLN.

Zloty valuation in relation to the euro or the franc was close to Friday's results. Compared to the pound, the zloty appreciated by 0.3%, over half less than in relation to the dollar. The probability of significant changes in the Polish currency seems to be limited. Moreover, the US markets are closed (Martin Luther King's Day), which causes a decrease in liquidity for the rest of the day. This should foster zloty valuation in relation to the main currencies around current levels, assuming that there are no significant changes in the dollar's value.

Tomorrow's preview

Data on December's consumer inflation (CPI) in the UK will be published by the Office for National Statistics at 10.30 a.m. It increased by 0.1 of a percentage point above market expectations to a level of 3.1% per year in November, at the same time being the highest in over 5.5 years. However, the core inflation (excluding food and energy prices) remained at 2.7% year-on-year for four consecutive months.

Both indexes are expected to decrease by 0.1 percentage points in December by the median. It may be due to a relatively high base last year (compared to the previous months). The pound can be strengthened, if the reading appears to be above expectations. However, it is worth remembering that after the Banks of England increased their main interest rate at the end of last year, they suggested that the next increase would not happen in the nearest future.

Therefore, the pound may be more sensitive to Brexit-related issues. The British currency could appreciate, if there is a reading that exceeds the consensus by 0.2 percentage points (in the case of the headline index) and if the core index exceeds 2.7% from the previous four months. Its further appreciation, combined with an increase in expectations of faster monetary tightening, could be achieved if the inflation growth pace continues to rise in the coming months.

At 2.00 p.m., the National Bank of Poland (NBP) will present core inflation data (excluding energy and food prices) for December. Its main index fell from 2.5% to 2.1% per year. Its core index probably fell in December from 0.9% to 0.8% (on a yearly basis) as well.

While the lower inflation growth pace provided more arguments for MPCs to continue its mild monetary policy for a longer period of time, external factors caused significant zloty appreciation in relation to the main currencies. However, if core inflation had fallen below 0.8%, it would have reached its lowest pace since August (similarly to the headline inflation reading). This could cause a clear depreciation of the zloty, if a rebound in the recent drops on the dollar is observed.