Afternoon analysis 29.01.2018

Inflation in the US in line with expectations, but the income growth pace increased in December and all of Q4. The dollar appreciated after the publication of data, although this is partially due to a significant appreciation of the franc in relation to the euro. The dollar's appreciation negatively affects the zloty.

Dollar on its way up?

Around midday, a faster pace of dollar appreciation was observed. The quotation of the main currency pair fell from 1.24 to around 1.235. The EUR/USD rate fell to the lowest level since last Wednesday. The Bureau of Economic Analysis (BEA) on PCE inflation in December 2017 in the US have been the main reason for the drop. Although the nearest future consumer inflation data (CPI) for January will be published, the PCE index is important due to the Federal Reserve taking the CPI into account when making inflation projections.

Core PCE inflation (excluding energy and food prices) amounted to 1.5% per year and 0.2% per month. December's reading of private spending - 0.4% increase per month was reached while 0.1 percentage more was expected was slightly below expectations, although November's growth data was revised upward from 0.6% to 0.8%.

Private income increased slightly above expectations by 0.4% compared to the previous month (the market consensus assumed +0.3%). The BEA report noted that the increase in private wages and interest income translated into a higher income in December.

In December, wages grew by 0.5% per month, the fastest pace since September. In turn, wages increased at the fastest pace (+4.0% QOQ) during all of Q4 since the first three months of 2017. While the most important index (core inflation) has been in line with expectations, the acceleration of private wage growth may indicate slightly higher inflationary pressure. As a result, the probability of more than three rate hikes in 2018 in the US may increase slightly, which may also translate into dollar strengthening and the recovery of recent losses.

Franc is getting stronger and zloty is losing

The dollar's strengthening was accompanied by continued franc appreciation, especially in relation to the euro. Today, the EUR/CHF quotations fell by about 0.5% (3:00 p.m.) to 1.155 (the lowest level since the first half of November last year). As a result, the Swiss currency significantly strengthened to the weaker zloty today. The franc rose to about 3.59 PLN, a little over 0.02 PLN more than the closing level seen on Friday.

The zloty incurred losses in relation to the dollar, and the exchange rate rose to the highest level since Wednesday (approx. 3.356 PLN). The recent global strengthening of the dollar has meant to evoke pressure on the entire zloty basket - in this case it was no different. Both the euro and the pound gained 0.3-0.4% in relation to the zloty. In the case of the franc, the euro and the dollar, these levels are still close to the last 2 to 3-year lows. If the dollar strengthening is permanent, the pressure on emerging countries currencies may weaken the zloty even further.

Tomorrow's preview

At 10:00 a.m., the Polish Central Statistical Office (GUS) will present Poland's preliminary estimate of the GDP growth pace in 2017. Median expectations indicate a pace of 4.5% per year. This is significantly more than it was last year (2.9%) or two years ago (3.9%), and would also be the fastest annual growth pace since 2011 (5%). Although the zloty's valuation mainly depends on external factors (the dollar and the euro's behaviour), a reading of 0.2 - 0.3 (or more) percentage points higher than the consensus could have a noticeable impact on Polish currency quotes.

One hour later, preliminary data on the GDP growth pace of the eurozone in Q4 was presented. In the previous quarter, the eurozone's economy developed at 2.6% in relation to the same period last year. This result was 0.1 percentage points higher than expected and that was observed in Q2. The median market expectations indicate that the pace in Q4 was 2.7% per year. Taking into account the current strong volatility on the market and the high euro valuation, the single area currency may be sensitive to deviations from the consensus.

At 2:00 p.m. Destatis will publish January's preliminary reading on consumer inflation (CPI) in Germany. The price growth pace will probably remain at the same level as it was in December, i.e. 1.7% per year (median expectations). The aforementioned, both from the eurozone and Germany, will likely not differ significantly from the consensus. However, if the deviation direction is similar (higher than the consensus GDP growth rate and inflation, for example), this may have a noticeable impact on the euro's quotations (strengthen slightly).