Afternoon analysis 18.12.2017

The Polish currency benefited from a better global sentiment due to the greater probability of changes in the US tax system. While main index contracts and shares in the US gained, the dollar remained weak. The EUR/USD pair remains at 1.18.

Good sentiment supported the zloty

All information points out that US President Donald Trump, will sign a tax law before Christmas, which reduces taxes for corporations from 35% to 21%. At the end of Friday's session, growth on American markets and increases in contracts for European stock indexes already came to be. These increases continued today as the main European indexes have increased by around 1%. The German DAX index increased slightly by more than 1.5% to the highest level since November the 9th.

A greater appetite for riskier assets was also reflected in the improvement of the zloty valuation. The EUR/PLN quotations fell again below 4.21, approaching Friday's lows. The USD/PLN pair on the other hand, fell below 3.57 due to the globally weaker dollar which is close to the lower limit over the last two weeks.

Scheduled macroeconomic publications over the preceding hours is practically empty. Therefore, the sentiment on stock markets is likely to have the greatest impact on the Polish currency. If we continue observing increases during the USA session and the main indexes reach new historical records, the zloty may remain in relatively good condition and the EUR/PLN pair may fluctuate around 4.21.

Weaker dollar

Positive sentiment and records regarding US stock indexes weren’t a favoring factor for the dollar. This is probably due to the lack of increased inflationary trends in the economy. Although the aforementioned tax cuts will likely stimulate inflation (through wage increases, for example). We will have to wait a few months to see the effects that these things have had.

Over the long term, the dollar should appreciate. However, its significant appreciation can only be observed in the case of significant increases in inflation over the coming months. This week, a slightly larger fluctuation on the dollar on Thursday could be observed when the final data on Q3 GDP growth pace will be published. The previous two readings turned out to be better than expected. If the GDP growth pace is exceeded by 3.3% YOY, a strengthening of the US currency could be observed.

Tomorrow's preview

At 10.30 a.m., the German Ifo Institute will present December's data for the German business confidence index. Over the past month, it has risen to record levels (117.5 points), underlining the continued positive condition of the EU’s largest economy. The market consensus indicates that this month the index could improve even more, if only by 0.1 points. Readings close to this range are unlikely to cause significant reactions for the euro, although it may contribute to maintaining positive sentiment in share markets. This, in turn, may have a positive impact on emerging currencies, including the zloty.

The Polish Central Statistical Office (GUS) will publish November's data on industrial production and retail sales. Production in October increased by 12.3% per year, noting that at the same time, the highest annual growth in 7 years had been reached. Median market expectations assume increases by 9% in November, while retail sales are expected to increase by 7.5%.

An increase in industrial production by around 10%, with a simultaneous increase in retail sales of at least 7-8% (previous four-month range), could strengthen the zloty. In this type of scenario, the probability of better than expected Polish economic growth rate in Q4 could be increased. Potential increases in the Polish currency may be limited by the Polish MPC's still relatively dovish attitude (increases are not expected before the end of 2018).