Afternoon analysis 30.01.2018

Inflation in Germany with a lower than expected result, but service prices continued its high pace. The dollar under pressure which was beneficial for the zloty. Market attention is focused on tomorrow's Fed statement.

Is the zloty paring some of its recent losses?

In the afternoon (around 2.00 p.m.), January’s preliminary data on consumer inflation (CPI) for Germany was published. The annual inflation rate of 1.6% was 0.1 percentage points below market consensus of 1.7%. On a monthly basis, a drop of 0.7% was noted, which turned out to be the highest in 11 months. Although this data failed to meet expectations, it had a limited impact on euro quotations.

One of the reasons for this modest impact on the euro may be the fact that a slower increase in energy prices was responsible for the lower price increases pace in January. At this time, an increase of 0.9% (yearly) was observed, compared to 1.3% in December and 3.7% in November. On the other hand, however, service prices (with an impact on the overall index of 52%) maintained the growth pace at 1.6%, similar to November's results.

During the morning, a gradual dollar appreciation was observed. The main pair's quotations (the EUR/USD pair) fell to around 1.234 (yesterday's lows). From 9.00 a.m. a weakening of the dollar again was noted, which pushed the EUR/USD exchange rate slightly above 1.245 at 3.00 p.m.

Today, a set of relatively favourable data on the Polish economy was published (preliminary GDP reading for 2017 was by 0.1 percentage points better than expected, the acceleration of investment growth pace in Q4), the weaker dollar condition also helped the whole zloty basket. The EUR/PLN quotations fell from almost 4.15 to 4.143, the USD/PLN pair from 3.36 to 3.33, and the CHF/PLN pair from nearly 3.59 to just over 3.57.

The probability of significant changes in the zloty valuation mainly depends on the US share and bond market situation. If there are no clear price drops there, the market's attention is most likely to be focused on tomorrow's Federal Reserve statement, therefore market volatility may be limited. At 4.00 p.m., the Conference Board will present January's consumer confidence index in the USA. Last month it fell from 16-year old records (128.6 points) to 122.1 points. Although a slight increase to 123.1 pts is expected, only a reading around these highs could support the dollar a little.

Tomorrow's preview

At 11.00 a.m. Eurostat will publish January's preliminary readings of consumer inflation (CPI) for the eurozone. The market's consensus suggests that the price growth pace will decrease from 1.4% to 1.3% (on an annual basis), although this may be mainly due to the relatively high base effect of last year (1.8%). Inflation of more than 1.3% could strengthen the euro and put pressure on the dollar. Today's reading from Europe's largest economy (1.6% vs. 1.7% consensus) may significantly reduce the chances of a positive surprise tomorrow. Therefore, the market can ignore this reading and focus primarily on evening events.

The Fed's Monetary Committee will publish a statement on monetary policy after a two-day meeting. The broad consensus indicates that interest rates will remain unchanged. On the other hand, it may be important to get the message from the statement and suggestions for rate hikes later in the year. Currently, the market assumes a little more than three rate hikes. However, if the message was to suggest the possibility of four increases, the dollar could appreciate. However, the chances for such a scenario are limited. Although the recent data did not disappoint expectations, it does not clearly indicate that inflation has entered a sustainable growth path (especially the core one).