Daily analysis 31.07.2017

Core inflation data from the eurozone should support both the EUR/CHF and the EUR/USD pair. Eurozone's economic parameters and the US have been coming together. The zloty has remained under pressure against the euro and forint. Moody's message about events in Poland.

Macro key data (CET time- Central-European). Estimates of macro data are based on Bloomberg information unless marked otherwise.

• 2.00 p.m.: June's preliminary reading on inflation from Poland (estimates: minus 0.2% MOM ; 1.6% YOY),
• 3.45 p.m.: Chicago PMI data for July (estimates: 60 pkt).

Increase of core inflation as a support for the euro

Since the morning, we had a slight slump of the European currency. However, a bit higher eurozone inflation and expected fall in unemployment should continue to support the relatively high EUR/USD and EUR/CHF levels.

The general price increase in the euro area was in line with expectations and coincided with a reading of 1.3% YOY. However, core inflation (excluding fuels and food) has accelerated to 1.2% YOY in July. Excluding April data, which was disturbed by Easter calendar shifts, this has been the highest core inflation readings in four years. This fact should increase the probability of a slow exit from the extremely mild monetary policy of the ECB.

It is worth noting, that core inflation in the eurozone has been approaching to PCE core in the USA. Still, in the first quarter both price measures were spaced apart by 0.8-0.9 percentage points, and now the gap has been only moving to 0.2 percentage point if the next US data will be identical to the last one.

Moreover, the situation with GDP readings has been starting to look similar. The economists' consensus has assumed the growth of the eurozone by 2.1% YOY in Q2. Therefore, exactly the same as the in the USA (using the same methodology). It can be stated, that it has been a good confirmation of the foreign exchange market behaviour. The difference between inflation and economic growth in the USA and the eurozone, instead of expanding, as it was expected by the end of 2016, has been clearly narrowing down.

It is also worth pointing, that data from individual countries of the common currency area has been looking, in some cases, really well. Industrial production in Spain increased in June by 14.5% YOY. In addition, it is the fourth consecutive increase over 10% YOY. June retail sales in Germany, which was supposed to grow 0.2% MOM (seasonally adjusted), and increased by 1.1%. In Slovenia, retail sales have increased by 10.2% in terms of the yearly basis.

It is clear, that the economic situation in the EU has been clearly improving and beginning to coincide with leading indicators (eg PMI). Declining unemployment (to 9.1% in June, the least since March 2009) and rising core inflation should additionally be sufficient arguments for the ECB not to withdraw from its recent suggestions and start the slow exit from the extremely mild monetary policy. This should support the EUR/USD quotations at least until the readings from the USA improve. The EUR/CHF pair has been likely to be supported by the single currency, especially since the SNB has been probably far from any reduction in the monetary stimulus.

The zloty still weak. Moody's statement

Both the USD/PLN and CHF/PLN pairs have remained close to several months lows. This does not change the fact, that the zloty has been still relatively weak. This has been especially visible in the pair EUR/PLN, which has been relatively close to 3-month highs and PLN/HUF, where the Polish currency in relation to the Hungarian has been close to its lowest level since March. The most damaging for the zloty has been the internal situation, as confirmed by a Moody's rating agency today.

In quoted by PAP Moody's statement, we can read: "Overhaul of Poland’s lower courts is weakening the rule of law. Revamp undermines devolution of power and independence of the judiciary. Escalation of a spat between Poland and EU may put country’s integration with the bloc in question. EU case against Poland may hurt investments". Moody's also states that "investment in Poland may also suffer through further escalation of disputes with the European Commission."

The zloty is likely to remain under pressure in the coming days, due to the winding down of issues raised by Moody's is unlikely. On the other hand, good data from the eurozone and the Polish economy have reduced the risk that the EUR/PLN pair will cross the fluctuation range of 4.25-4.27.