Daily analysis 29.09.2017

Lower than estimated eurozone core inflation does not result in a clear response regarding the EUR/USD. The UK's publications, which are noticeably weaker than the consensus, depreciated the pound. The zloty remained under pressure. The EUR/PLN pair above the 4.30 boundary. The Polish Central Statistical Office (GUS) data on inflation from the country with a rather limited impact on PLN.

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.: Consumer inflation in Poland (estimate: 2.0% YOY),
• 2.30 p.m.: Income and spending in the US (estimates: 0.2% MOM and 0.1% MOM, respectively),
• 2.30 p.m.: PCE inflation in the US (estimates: 1.5% YOY and 0.3% MOM; core inflation: 0.2% MOM and 1.4% MOM).

Attention transfers to economic data

The last hours on the currency market were relatively calm. Investors' interest in changes to the US tax system has slightly decreased. The budget for 2018 may be voted on through next week, but tax modification is expected to be included in the budgetary adjustment process, which could mean a few additional weeks of discussions within the Republican party on the final form of taxes and their impact on the outlook for the deficit in the next decade. Therefore, it is possible that this is a relatively distant perspective for the market, which is why we have a rebound on US Treasury bonds and dollars. The yields on Treasury bonds that will be maturing in 5-years return to approx. 1.90% after testing the 1.95% boundary yesterday.

The slightly weaker dollar also allowed the EUR/USD to approach ≈1.18 level, while in the context of political events in Europe, on the front page of today’s Financial Times we read that, "Merkel signals readiness to engage with Macron on EU reform." However, it seems that so far, in order for such statements to cause more significant movements on the EUR/USD or the EUR/CHF, we should be acquainted with more details about the hypothetical CDU/FDP coalition.

Theoretically, today's inflation reading for the single currency area should be negative information for the euro. According to Eurostat, September's consumer prices rose by 1.5% YOY, but in core terms (excluding food, beverages and tobacco) they only increased by 1.1% YOY. This was 0.1 percentage point reading below August's data and economists' expectations. Service inflation also decreased (from 1.6% to 1.5%), which means lower price pressure in the eurozone. However, the EUR/USD responded to this data in very limited way.

In the afternoon, however, there will be a PCE inflation reading from the USA (for August). The market already knows the data for this month, but today's publication is mainly taken into account due to the macroeconomic projections of the Fed. The overall reading may be slightly higher than it was in July (an increase of fuel prices Hurricane Harvey), but the core component is expected to remain at 1.4%. Its hypothetical decrease by 0.1 percentage point would mean leveling the lowest readings for more than 6 years, which could be negatively received by the dollar. It should be remembered, that the Federal Reserve clearly suggests that the recent low inflationary pressure is unlikely to result in the monetary tightening path stopping, which was suggested in September. In addition, the ongoing discussion on fiscal reform may also lead to a situation where even if the publication deviates downward from the consensus, the weakening of the dollar does not necessarily have to be strong. In turn, estimates higher than those of the PCE's may result in the FOMC statement being considered more likely to be fulfilled and a positive response to the dollar to be more significant.

The pound more stable after received data

Today, the good condition of the British currency has been shaken by macroeconomic data, which is far worse than expected. First of all, it is worth noting that the current account balance deficit (C/A) is significantly higher than expected. It amounted to 23.2 billion GBP in the Q2. This is 7 billion more than expected by economists. In addition, revised data for the first three months of the year increased the deficit by more than 5 billion GBP to 22.3 billion GBP.

Keeping the C/A deficit in the range of 4.4-4.6% GDP given such a strong weakening of the sterling, shows that the adaptation of the British economy to new external conditions may continue to put pressure on the local currency. GDP growth was also revised downward (from 1.7% YOY to 1.5% YOY in Q2). The GBP/USD pair fell below 1.34 after data, which also allowed to the pound to depreciate in relation to the zloty at the level of 4.90.

Stabilisation at lower levels

Around midday, the EUR/PLN has been within the range of 4.31, so exactly the same amount as yesterday at the same time of day. However, the zloty has still been relatively weak this week, losing against the euro by approximately 1% and 0.7% against the forint.

In the afternoon, apart from data from abroad, readings from Poland will also be released to the market. September's preliminary data on inflation presented by the Polish Central Statistical Office (GUS) is to show an increase in consumer prices from 2.0% YOY. A higher reading than the consensus could help the zloty, but the first monthly estimates do not include the breakdown of price to components, which makes it difficult to estimate whether they result from the growth of raw materials, food, or core categories. As a result, the PLN will rather be influenced by global events, which do not currently support the condition of the national currency.