Afternoon analysis 19.01.2018

December's industrial production, retail sales and producer inflation in Poland failed to meet market expectations. The main currency pair's quotations remained above the 1.22 level. The ECB meeting as the most important event of the next week in the foreign exchange market.

Slightly weaker data from Poland

Today, the Polish Central Statistical Office (GUS) published December's data on retail sales, industrial production and consumer inflation. It failed to meet market expectations. Although retail sales still showed a relatively high growth rate of 6% per year (more than a year ago there was no growth below this level), the market consensus assumed a growth pace of 2.6 percentage points higher. This was the second lowest result in 2017 (in June it was 6% as well).

Activity in the industrial sector increased by 2.7% year-on-year, 0.8 percentage points slower than market expectations. On the other hand, producer inflation (PPI) fell to 0.3% year-on-year (0.7% expected), which was the lowest result since September 2016. However, it should be noted that in 2017 there were 19 working days, comparing to 2016, where there were two more. Therefore, the readings for retail sales and industrial production may appear slightly weaker compared to the previous months.

Today's GUS data publication had a limited impact on the zloty whose movements were mainly a result of external factors. The Polish currency slightly depreciated since the beginning of the morning session. The range of EUR/PLN quotations moved from yesterday's range of 4.16-4.17 upwards by 0.01 PLN, while the USD/PLN increased to 3.41 PLN, slightly over 0.01 PLN more than during yesterday's closure.

EUR/USD dropped from 1.23

Even before midday, the main currency pair quotation rose to the level of 1.23. In subsequent hours, the rate decreased to 1.223 around 3.00 p.m. This may have been the reason for slight zloty weakening, which is particularly sensitive to the US currency appreciation.

Apart from lower than expected macroeconomic data from the Polish economy, negative pressure on the zloty may also raise concerns about the so-called "government shutdown" in the US (closure of some federal institutions due to a lack of financing) or weekend events in Germany concerning the possibility of forming a coalition.

The dollar quotations, and therefore, the majority of the zloty basket, may be influenced by the consumer sentiment publication for January by the University of Michigan. The median of market expectations indicates a reading of 97 pts, 1.1 pts more than a month earlier. However, this is rather secondary data in terms of its impact on the dollar. A reading above 98.5 pts (which would be the highest level since October 2017) probably could strengthen the dollar and weaken the zloty at the same time.

Next week's preview

A two-day meeting of the Governing Council of the European Central Bank (ECB) is likely to be the most important event of next week. Changes in the monetary policy are not expected either at the interest rate level or in the asset purchase program.

Market's attention may be focused on the statement and the press conference by Mario Draghi (the President of the ECB). A few members of the ECB have recently expressed concerns about the high euro exchange rate, whose appreciation is considered to be detached from the foundations. It was triggered by minutes from the previous ECB meeting, which was received by the market as hawkish.

The higher exchange rate of the single currency may be cumbersome for the ECB, as it may hamper the inflation from returning to the inflation target. Also, underlying inflation remains suppressed at the moment - core inflation (excluding energy and food prices) did not exceed 1% per year in December, and the last time it was more than 1.2% was about 4 years ago.

Therefore, if the euro continues to remain at high levels in relation to the main currencies, the ECB may express concern about the impact of the exchange rate on inflationary processes. In this case, this could result in a weakening of the euro. It wouldn't be a negative thing for the zloty alone. However, accompanied with the dollar appreciation, the Polish currency could lose some value. Additionally, if Friday's data on GDP growth rate in Q4 in the USA was higher than expected (consensus: 2.9% YOY), the zloty could remain under pressure at the end of the week.