Inflation in Poland the highest since 2001 (Daily analysis 17.08.2020)

The continued weakness of the dollar and positive sentiment in the broader market are positive signals for the zloty. Data from the Polish economy are somewhat positive, and today they indicated the highest inflation in almost 19 years. However, the data may have a greater impact only in the following months.

The dollar is still near it record lows

Monday began with calm trading on the foreign exchange market. Although the changes were limited around midday, we observed a continuation of the trends observed on Friday, i.e. the weaker dollar. Although the US currency was losing marginally, as about 0.1% to the euro, this still maintains the EUR/USD quotations in close proximity to over two-year highs.

This ongoing weakness of the dollar, combined with the still relatively low level of risk aversion, has a positive effect on the zloty. As a result, the zloty is still in good condition - positive macroeconomic data also help here, although their impact is already somewhat smaller.

The zloty once again among the strongest EM

Around midday, the zloty is again one of the strongest currencies of emerging countries (EM), although due to slight fluctuations in the broader market, changes in the zloty are limited and range from about 0.1-0.2% in relation to the main currencies. The USD/PLN exchange rate fell below the 3.70 limit for a moment, and the EUR/PLN rate fell to about 4.3830 before midday.

The data on inflation have given positive signals for the zloty today. According to the National Bank of Poland, consumer inflation (the so-called core inflation), excluding the impact of energy and food prices, in July amounted to 4.3% annually. This is 0.1 percentage point above the market consensus, and the highest level since December 2001.

Rising inflation in Poland is nothing new. Its core inflation index has been growing at a fast pace since the first months of 2019, and still in January of that year, it was even below 1%. At present, it is not mainly a monetary policy concern, and relatively high core inflation levels may be temporary.

However, this may become an increasingly important factor at the beginning of next year, when the coronavirus situation will become more stable. Rising inflation may potentially mean higher interest rates in the future, forcing the NBP to increase them, perhaps even before the end of 2021.

As a result, more and more signals indicate that the zloty will come out relatively stronger from the pandemic. Today, on the other hand, the afternoon should not bring more significant changes on the currency market due to a practically empty calendar of important macroeconomic events.