In Germany, uncertainty about the coalition started euro depreciation. Core inflation in the UK was slightly below expectations. The zloty reacted more strongly to reports from Germany than other currencies. The Polish currency lost not only in relation to the dollar but also to the euro, the forint and the Czech koruna. The EUR/PLN slightly above the 4.18 boundary.
The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.
- 2:00 p.m.: Core inflation from Poland for December (estimates: 0.8 % YOY and 0.1% MOM).
Reports from Germany depreciate euro
Most of the information reaching the market was perceived as positive for the euro and negative for the dollar. Therefore, the main currency pair even amounted to 1.2300, reaching 3-year highs. However, moods have been cooled down by reports from Germany in the morning.
Around 8.00 a.m., some of the media (Bloomberg, Reuters) began to report that the Berlin-based SPD delegates are against the CDU/CSU coalition (21 against and 8 for). It was a surprise, especially due to the fact that last week an outline of a new coalition programme appeared and preliminary discussions between parties were considered a breakthrough.
The main currency pair (EUR/USD) depreciated quickly to around 1.220-30. After a while, a significant part of the losses were pared when it appeared that the Berlin delegates were not a serious threat to the coalition, as they represented a small percentage of the 600 representatives, who during the weekend convention in Bonn will decide whether to make a coalition agreement with the CDU/CSU or not.
Clearly, the uncertainty in Germany has disrupted euro quotations. In the morning, it tested 1.2200. Even though political issues in Germany are not as important for the market as in the case of ones from other EU countries it seems that the market has found a good reason to generate a correction especially because such strong increases in the past few days have had rather weak justification for doing so.
Slowdown in British inflationary processes
The data from the United Kingdom, published in the morning, indicated a slowing down of inflationary processes. Consumer prices fell to 3.0% year-on-year in December (in line with expectations). However, the CPI in basic terms fell from 2.7% YOY to 2.5% YOY, which was 0.1 percentage points below market consensus.
Today, the ONS (the Office for National Statistics) published data that may suggest an increased chance for an inflation drop. In November, the Bank of England estimated that the CPI would fall to 2.4% in Q4 in 2018. This becomes more likely, especially as current inflation publications are a result of strong pound depreciation on the global market. Currently, the pound is paring losses in relation to the dollar (the most expensive since the Brexit vote) and is not depreciating compared to the euro. This, in turn, reduces the chances of a much tighter monetary policy.
It seems the consensus of one 25-basis-point increase every year over the next three years may be confirmed, which means that the Bank of England's decisions should not help the pound now. As a result, the sterling valuation is likely to be mainly dependent on the progress of negotiations on trade following Britain's departure from the EU.
The reports from Germany increased pressure on the zloty. Due to the decrease of EUR/USD, an increase in the valuation of USD/PLN was observed - from 3.40 to 3.42 and the appreciation of the euro from about 4.17 to 4.18 PLN. The zloty more than other currencies in the region reacted to reports on German politics, which proves its sensitivity to external condition. The forint and the Czech koruna did not fluctuate much since yesterday's closure.
In the afternoon, the NBP will publish data on core inflation. It is unlikely for it to reach 1.0% year-on-year, which means that price processes, excluding fuels and food, will remain moderate. This, in turn, will probably be an argument for the majority of MPC members not to suggest the increases in interest rates before the end of the year. Today, the opening of US trading after the long weekend will be important for the zloty. If the dollar continues to pare losses, the zloty may continue to depreciate even in the case of good sentiment on the US markets.