Afternoon analysis 18.09.2017

August's inflation in the eurozone is in line with expectations. The pound is slightly weaker partly after Boris Johnson's comments. Wages growth is accelerating noticeably, but for the Polish zloty, the dovish attitude of an increasing part of the MPC is more important. The EUR/PLN pair close to the 4.29 boundary.

The trade in the currency market is relatively calm in the afternoon. Investors are likely to be preparing for the Federal Reserve meeting on Wednesday. Given that it may give a signal to the dollar for the next few weeks, many of them may avoid making more serious decisions before the Fed's statement. As a result, the EUR/USD fluctuates close to the current level of balance around 1.1950.

The publication of the final inflation data for the eurozone hasn't changed this attitude significantly. According to Eurostat, consumer prices in the single currency area increased by 1.5% YOY in August. Excluding fuel, food, beverages and tobacco, inflation amounted to 1.2% YOY, which was also in line with Eurostat's first estimates. The figures are therefore by no means surprising. Only in countries where the economic situation have been increasing relatively fast (Lithuania, Latvia, Estonia - GDP growth of 4-5% YOY), there is a growing inflationary pressure (from 3.2% to 4.6%). This may show that the current monetary policy of the ECB is too mild for the Baltic countries. However, this should not have a major impact on the activities of monetary authorities in the eurozone as a whole.

Correction on the pound. High wages growth in Poland

After last week's very strong growth on the British currency, we are dealing with a small adjustment now. It may be partly due to Boris Johnson's article published in "The Telegraph". The Foreign Minister's opinion on Brexit (e.g. transitional period, paying the EU contributions, access to the common market) is clearly "harder" than is to be presented by PM Theresa May during her speech in Florence on Friday.

During the next few days, the expectation for a soft Brexit can, therefore, be toned down, especially as it is possible that other members of the Tory may start supporting Johnson's stance. The Bank of England's monetary policy would not be supported by the risk of a greater split between conservatives. This would also reduce the chances of further sterling appreciation.

While moving to the domestic currency market, it is worth noting the other good data on wages. According to the Polish Central Statistical Office (GUS), the average wage in the corporate sector increased by 6.6% YOY in August. At the same time, it was the fastest growth in over 6 years.

Theoretically, this data should be favourable for the zloty. However, recent comments by three members of the Polish MPC (Eryk Łon, Jerzy Żyżyński, Jerzy Kropiwnicki) suggest that rate hikes may be significantly delayed compared to the market's scenario, which has been created only recently. As a result, the zloty remains relatively weak and loses about 0.3% in relation to the euro. If the subsequent opinions of the Council representatives coincide with those of Eryk Łon or Jerzy Kropiwnicki, then there is a considerable risk that even with a relatively stable external environment, the EUR/PLN pair may cross the 4.30 boundary. At the same time, these would be the highest levels since March 2017.