Afternoon analysis 15.11.2017

Core inflation in the US above expectations and the highest in half a year - a possible reversal of the trend on the dollar. Turmoil on the market due to the dollar's depreciation, the euro's appreciation and a worsening of sentiment on the market with limited impact on the zloty trading.

Data may support dollar

The long-awaited data of the Bureau Labor Statistics (BLS) on consumer inflation in the US in October exceeded market expectations. Although the main reading was in line with the consensus (2% on an annual basis), a more significant core reading (excluding energy and food prices) indicated inflation at the 1.8% level. This is, by 0.1 percentage points above market expectations and its highest level since April (we observed a level of 1.7% in the previous five months).

The Census Office also published retail sales data for October at the same time (2.30 p.m.). The month-on-month increase of 0.2% turned out to be above consensus (0.1%), last month's data also revised upward from 1.6% to 1.9%. On the other hand, the increase in retail sales excluding car sales by 0.1% turned out to be slightly below expectations (0.2%). However, as in the previous case, the data for the last month was revised upward from 1.0% to 1.2%.

Therefore, the inflation and sales data should help the dollar to strengthen overall. However, the first dollar's reaction was negative - immediately after the publication, the EUR/USD pair set new highs (1.1860). This is the highest level in nearly a month. However, it seems that the arguments for this two-day appreciation of the EUR/USD exchange rate are rather exhausted and the chances for further strong increases are limited.

In the longer perspective, this data should help the US currency, as it slightly increases the chance of faster monetary tightening in the US. However, it should be remembered that the market is also currently experiencing problems with the implementation of tax reform in the US. The USD depreciation (and the EUR/USD appreciation) was correlated with the decrease of the main market indexes in the US and Europe.

If the US main market indexes were deepening today's recent declines, the dollar could also incur some losses. However, the risk of such a scenario being implemented in the context of published data appears to be limited.

Stable zloty

Given the worsening market sentiment (continuation of the share market depreciation and the EUR/USD appreciation), the zloty's quotations remained stable. The EUR/PLN quotations moved between 4.24 and 4.25, close to the upper range of quotations from the last two weeks, although this was mainly due to the globally stronger euro. On the other hand, the strong depreciation of the dollar against the euro also resulted in a marked drop in the USD/PLN pair - a price below 3.58 was the lowest since October 20th.

However, the US consumer inflation data published today may support the dollar, which may have an impact on the USD/PLN exchange rate rise towards the 3.60 boundary. Should the dollar get stronger in the following hours, also in relation to the euro, the EUR/PLN quotations could get closer to the 4.24 boundary.

Tomorrow's preview

At 10:30 a.m., the Office for National Statistics (ONS) will present retail sales data in the UK economy in October. In recent months, the growth pace has remained relatively low - in September, the growth of 1.2% compared to the same month a year ago failed market expectations (2.1%). For several months, the real wages of Britons have been gradually falling (lower than the inflation rate), which is reflected in consumption.

This is also indicated by the median of market expectations, which assumes a 0.6% decline in retail sales in October as compared to October 2016, and a 0.4% decrease in its core index (excluding car and fuel sales). This would be the first annual drop in retail sales in just over four years, and a reading below this consensus could weaken the pound, as it could also mean that the probability of a lower than expected GDP growth pace in the last quarter of this year would increase.

The Department of Labor will provide weekly data on the number of initial jobless claims. However, given that this data may still be affected to some extent by September's hurricanes (although the impact is decreasing), the market may focus on October’s industrial production data published by the Federal Reserve, which is published 30 minutes later.

It increased by 0.3% in the previous month in comparison to August, while its largest component, manufacturing production, recorded a marginal increase of 0.1%. The market consensus indicates an increase in the overall production index of 0.5% in October compared to the previous month while manufacturing production increased by 0.4%. In both cases, these would be the highest increases since April. Given the recent fluctuations in the dollar's value (its depreciation), data slightly better than the consensus could help to pare the losses incurred. A higher production growth pace could suggest a higher contribution to GDP growth pace in the last quarter.