Afternoon analysis 29.09.2017

PCE inflation data worse than expected - the dollar incurred slight losses and the EUR/USD pair reached its highest level since Tuesday. In contrast, the Polish preliminary data on consumer inflation (CPI) turned out to be much higher than expected, which may help the zloty.

Dollar incurred next losses

After slightly lower than expected September's consumer data for the eurozone, the US PCE inflation data for August failed to meet market expectations as well. In both cases, the core inflation indexes for both regions were below the consensus by 0.1 percentage point.

Even before the publication of Bureau of Economic Analysis (BEA) data in the US, the dollar has been depreciating despite weaker information from the eurozone. The EUR/USD pair breached again the 1.18 level in the morning, and the BEA's publication at 2.30 pm made it possible to trade on the level of approx. 1.183.

Ultimately, however, the data may have a relatively limited impact on the dollar and the EUR/USD may move towards the 1.18 boundary. On the one hand, there is August's data on PCE, but on the other hand, it is a type of inflation that the Federal Reserve (Fed) takes into account in its projections. In recent statements, the Fed has repeated its commitment to monetary tightening, which may limit the negative impact of today's data.

However, it should be noted that the core index in the period of April-August had gradually been decreasing and indicated no improvement in either of them, showing a negative trend. Despite the hawkish statement of the Federal Reserve, after today's data, the market may be somewhat more cautious about the announcement of monetary tightening. It also makes it possible to increase the importance of next week's report on the US labour market. If the data on wage growth was also below expectations, the dollar could again be under considerable pressure.

Inflation in Poland surprises

The preliminary estimates of the Polish Central Statistical Office (GUS) indicated today that September's inflation rate in Poland was 2.2% (compared to September last year). This was above market expectations of 1.9% - 2.0%. Compared to August, the average level of consumer prices increased by 0.4%, which was the highest increase since January this year.

Moreover, aforementioned, worse than expected data on the PCE inflation in the US, weakening the dollar, has been adding additional support to the zloty (in the past few days, the Polish currency has been depreciating as the dollar has been appreciating). This may cause the zloty to continue to gain in value later in the day. Shortly after the US data publication, the EUR/PLN pair dropped to nearly 4.29, while the USD/PLN to 3.63.

However, it should be noted, that inflation data from the Polish economy is just an initial estimate, without components, therefore the real reason for such a significant increase in inflation is unknown. Nevertheless, given the recent oil price rises, we are likely to estimate that fuel prices have had the greatest impact on this increase. Therefore, the inflation core index (without the most volatile energy and food prices) could remain relatively stable, which in turn, may limit the appreciation potential of the zloty.

Next week's preview

The last two weeks have been characterised by a relatively large fluctuation of the dollar. On the one hand, we had a hawkish statement from the Federal Reserve, which increased the likelihood of rate hikes and thus improved the dollar's valuation. On the other hand, President Donald Trump's presentation of the tax reform program has weakened the US currency somewhat, due to the lack of individual tax thresholds' clarification or opposition to what the project is likely to encounter in Congress (the support of Democrats is required),a mong others.

Next week will be another one in which we can observe a significant change in the dollar's value. On Monday, the publication of the ISM manufacturing index for September is planned, which reached the highest level in three years (58.8 points) a month ago. On Wednesday, however, we will get to know the value of this index for the service sector, where the situation was worse. In July, it reached its lowest level in nearly a year (53.9 pts.) - although it rose by 2.4 pts in August, it was below expectations and remained at a relatively low level.

The aforementioned publications may increase the dollar's volatility, but investors' attention will be focused on Friday's report on the US labour market. Significant changes in the American currency are expected around the time of its publication. The main data to which market participants will draw attention is that on employment changes in the non-farm private sector and on changes in average wages.

The former is likely to be low due to the hurricane's effects that hit south-eastern US. The latter can, therefore, be key data. Information on how the average wage has changed may give hints of future inflation level. Its high level of growth puts additional pressure on inflation, which could increase the likelihood of rate hikes in the US and thus strengthen the dollar. However, it seems that even slightly lower than consensus data (current increase by 0.3% on a monthly basis, 2.6% on an annual basis) will not be able to significantly worsen the dollar's valuations for a longer period, given the hawkish statement of the Federal Reserve.