Afternoon analysis 16.01.2018

The zloty exchange rate was not influenced by marginally higher than expected core inflation in Poland. Pressure on the euro was evoked after worse than expected data from the eurozone.

Core inflation with a positive surprise

Yesterday, the final consumer inflation data (CPI) from the Polish economy in December was published. It reached 2.1% per year and appeared to be 0.1 percentage point higher than the preliminary reading. Core inflation, published by the National Bank of Poland, excluding food and energy prices, surprised positively.

The increase in the core inflation index at a 0.9% a year pace also turned out to be 0.1 percentage points above market expectations. This was an analogical result that was observed in November. However, the reaction to gold was limited. Perhaps, this is the result of an accommodative approach of the MPC to monetary policy and only significant acceleration could trigger a wider discussion about the possibility of earlier monetary tightening and strengthen the zloty at the same time.

The zloty remained close to yesterday's level in relation to the euro (approx. 4.17 PLN), but incurred losses of about 0.2% to the franc and the pound. A decrease in value in relation to the dollar by 0.5%, in turn, was caused by the rebound of the last US currency drops.

EUR/USD below 1.22

Around midday, the main currency pair (EUR/USD) tested the 1.22 level. After the recent rapid increases, a recovery on both the pair and the dollar could be expected. Today, the euro was in worse condition due to the opposition of the Berlin-based SPD delegates to the CDU/CSU coalition.

Around 3.00 p.m., the EUR/USD quotations dropped to the level of 1.22. It could have been a reaction to a comment from one of the European Central Bank members, François Villeroy de Galhau. He stated that the ECB should monitor the impact of euro quotations on prices.

For the ECB, the high euro valuation in relation to the main currencies may be a problem, as it may decrease the inflation growth pace (e.g. through lower prices of imported goods and services). Villeroy's statement may suggest that if the euro is traded at high levels, the ECB may withdraw more slowly than expected from quantitative easing by extending the bond-buying program beyond September this year.

In the subsequent hours, slightly increased pressure on the euro can be observed, taking into account the negative information that has been received today. However, it should also be remembered that today, the US investors have returned after a session break, which may further increase the volatility of the main currency pair.

A stronger dollar and the EUR/USD pair depreciation may be bad news for the zloty. A single, minimally better than expected inflation reading perhaps will be ignored by the market, and external factors will have a much greater impact on zloty quotations.

The important factors will not only be dollar quotations (which are more likely to depreciate in relation to the zloty), but also the quotations of the main indexes in the US. They have opened record-breaking levels, but in case of their later recovery and the stronger dollar, the zloty may be under pressure and lose in relation to the main currencies.

Tomorrow's preview

At 2.00 p.m., the Polish Central Statistical Office (GUS) will publish December's data on average wages and employment change in the Polish enterprise sector. During the past few months, employment has been growing at a moderate pace 4.4% to 4.5% a year. Currently, the market consensus indicates an increase of 4.4% compared to December 2016.

However, the wage growth pace significantly accelerated. In October, it reached 7.4% year-on-year and was the highest in almost 6 years. The following month noted a 6.5% decline, but the median of expectations indicates it to grow to 7.1%. Wage increases above this level could result in higher inflationary pressures, which could slightly strengthen the zloty.

At 3.00 p.m., the Federal Reserve will present data on industrial production in the US for December. After a slightly weaker November (increase in industrial production by 0.2% per month), the market consensus assumes increased activity in the sector by 0.4% in December. The same appreciation is expected in the case of its main component - manufacturing production.

This may be an important publication, in the context of the recent sharp weakening of the dollar. Better than consensus data may give an impulse for the dollar to rebound (its depreciation was detached from appreciating yields of the US Treasury bonds). The dollar's appreciation could also weaken the zloty. In such a case, the Polish currency could lose even if the data from the Polish economy on the wage growth pace was better than expected.