Inflation in Poland the highest in 7 years (Daily analysis 7.01.2020)

Yesterday, the final PMI data from the eurozone were published and were above expectations. Today the sales growth is stronger - as a result, hopes for a slight recovery in the Q1 are growing. Prices in Poland in December rose at the fastest pace since the end of 2012. Inflation at the level of 3.4% is mainly caused by food prices which are higher by 7.0% than a year ago.

Currencies underestimate geopolitical tensions

Other positive signals from the eurozone. After yesterday's better than expected final PMI (services and aggregate) index data, today's retail sales data have come as a positive surprise. Sales increased in November by 2.2% annually, 0.7 percentage points above expectations. The October data were also revised upward by 0.3 percentage points. This does not yet cause euphoria, but it may reinforce the argument about a slow rebound from the economic downturn in the eurozone, which may support the euro even more when other macro readings confirm this trend.

The EUR/USD exchange rate is closed in the range of approx. 1.11-1.12. One factor that may potentially strengthen the dollar and bring the EUR/USD exchange rate closer (or below) to this lower limit is an increase in geopolitical tensions. Although the foreign exchange market has reacted very calmly to the tense situation between Iran and the US, the retaliatory action by the Iranian side may meet with increased demand pressure on the dollar. The absence of a substantial escalation of the conflict may, however, support the euro's valuation against the dollar in the coming months, given that central banks in both regions will leave interest rates unchanged this year, and we can observe a slight recovery in the eurozone.

The PMI data published yesterday (slightly better than expected) from the eurozone and the EUR/USD quotation growth supported the zloty. The zloty's basket was clearly stronger than the main currencies this morning. The EUR/PLN exchange rate, falling to 4.23 this morning, set the new lowest rate since the end of April 2018. Shortly afternoon, however, a slight rebound of these increases (approx. 0.3%) against the main currencies was observed and the EUR/PLN exchange rate rose again above 4.24, while the USD/PLN exchange rate approached 3.80. These are still relatively low levels, however, and the market situation supports the currencies of emerging countries, including the zloty.

Food in Poland more expensive by 7%

The Polish currency could be supported by data on consumer inflation (CPI) in December. Prices in Poland increased on average by 3.4% annually, according to the Polish Central Statistical Office (GUS) estimate, by 0.6 percentage points above expectations and 0.8% above November's level. Such a rapid inflation growth was caused by food (and soft drinks), whose prices increased by 7.0% year-on-year. The December inflation level still remains within the deviation range from the NBP's inflation target, and after eliminating food prices - the (core) inflation did not increase so strongly. A one-off reading of inflation including food is unlikely to change the Polish Monetary Policy Council's approach fundamentally, but the message from MPC members, may be a little more hawkish, which may strengthen the zloty. However, it is hard to expect interest rates to rise in the coming year (without a strong, sustained increase in core inflation) when the largest central banks in the world are holding back on rate changes.