Daily analysis 13.03.2017

The National Bank of Poland published a report on inflation in which it revised the path of inflation upward – despite its relatively high level, the MPC stance weakens the zloty. The dollar was slightly stronger by midday on Fed expectations.

Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information unless marked otherwise.

• No macro data that could significantly impact the analysed currency pairs.

NBP’s projections fail to support zloty

The National Bank of Poland’s “Report on Inflation”, published today, suggests that consumer inflation (CPI) won’t hit the inflation target by the end of 2019, even though its path was revised upward due to rising agriculture and energy commodities’ prices. It is said to reach 2% YOY in both 2017 and 2018 and should be even 0.3 percentage points higher the following year. The core index (excluding energy and food prices) ought to accelerate to 2.1% YOY, according to NBP’s projections.

The Polish Central Bank also forecast that GDP growth, after a 2016 slump (2.6% YOY), should rise to 3.7% this year. However, the growth rate is said to cool down to 3.3% and 3.2% in the next two years, respectively. This year’s bigger increase in GDP could be attributed to a 6% growth in capital expenditures, while last year capex fell by 5.5%.

We also read in the report that NBP anticipates a further improvement in the Polish labour market. The unemployment rate should drop to 5.3% this year and continue to fall to 4.9% and 4.6% in 2018 and 2019. Projections for earnings are optimistic as well – this year they should increase by 4.6% while in 2019 the growth rate should pick up to 6%.

The zloty didn’t react positively to the data coming from the report. The market still remembers the surprisingly dovish stance of Adam Glapiński, the chairman of the Polish Monetary Policy Committee, who suggested during the last MPC press conference the possibility of no rate hikes even until the end of 2018. The fact that upward-revised inflation is to remain below the inflationary target doesn’t help the Polish currency in this regard.

Today, the EUR/PLN reached the highest level in one and a half months (ca. 4.354), but returned to 4.34 by midday. It was still the higher boundary of the pair in the mentioned timeframe. A similar reaction could be observed in the case of the Swiss franc, the British pound or the dollar in relation to the zloty. The negative sentiment towards the Polish currency could also be noticed in relation to the Hungarian forint – the PLN/HUF pair fell below the 72 level before midday.

Dollar regains strength

The dollar remained under pressure during the Asian session today after Friday’s labour market data. Although the report wasn’t severe, high expectations after Wednesday’s ADP employment report (+298k) and slightly weaker average hourly earnings (by 0.1 percentage point) added to the dollar’s depreciation. The EUR/USD pair went up to 1.07 again, the highest level in a month. However, one must point out that the euro has been somewhat stronger on hawkish signals coming from the European Central Bank.

Since around 8 a.m., EUR/USD went down around 40 bp lower to 1.066. On Wednesday, we are anticipating the Federal Reserve’s decision regarding the level of interest rates, which the market currently focuses on. The probability of a rate hike is presently measured at 100%. The main focus point should be whether the Fed suggests more than three rate hikes in 2017. Should it imply such a possibility, the dollar could appreciate.

The market has also been closely watching the events unfolding in Great Britain. Theresa May, GB’s Prime Minister, could trigger Article 50 of the Lisbon Treaty as soon as Tuesday, should she convince her opponents (even among her own ranks) to reject the amendments to the bill. The British currency depreciated in the last two weeks – nearly 3% in relation to the dollar. Today, it gained 0.3% to the dollar around midday but it was still close to two month lows. The pound could be potentially hit with higher volatility as the debate regarding the bill to exit the European Union continues. If May triggers Article 50 swiftly, the pound could be put under downward pressure.