Inflation in the US is heading for the pre-pandemic level (Afternoon analysis 11.09.2020)

The EUR/USD rate returns to the level seen a few days ago. Prices in the USA are rising above expectations in August. Market attention is shifting to the Federal Reserve. The zloty is stable.

Greater demand for used cars

In the afternoon, one hour before listing on the New York Stock Exchange began, the Bureau of Labor Statistics (BLS) published data on Consumer Inflation (CPI) in the US in August, which exceeded market expectations. The headline inflation rate rose from 1.0% per year to 1.3%. Core inflation, i.e. without the impact of energy and food prices, was also a positive surprise.

The core inflation calculated in this way increased by 0.4% on a monthly basis, above the expected 0.2%. On an annual basis, there was also an increase: from 1.6% in July to 1.7% in August, which means that quite quickly the average price growth returned to pre-pandemic levels (2.1% in March, 2.3% in February). The higher inflation in August was driven by a strong increase in prices of used cars (by 4% year-on-year), suggesting a significant increase in demand for them.

Data indicating a higher pace of inflation (in contrast to the eurozone) may be a factor holding back the dollar from further losses against the euro, although it is probably of relatively low importance today. The focus continues to be on central bank activities.

After a mild statement (positive for the single currency) from the press conference of Christine Lagarde, President of the ECB, and a slightly sharper blog post by Philip Lane, Head of the ECB's Economists, the euro/dollar exchange rate is around the same level as it was before the start of yesterday's events related to the eurozone central bank.

On Wednesday, there might be an earthquake in exchange rates

The EUR/USD quotations after rising above 1.19 and then falling to about 1.181 stabilized around 1.184-1.185 in the afternoon. However, the slight appreciation of the dollar, which we observed from the Wednesday early morning, was stopped. It was also associated with the deterioration of sentiment on the broader market (strong sale off on the equity market, especially of technology companies in the USA).

The market's attention can already shift to next week's events. On Wednesday, the Federal Reserve will publish an announcement after the Monetary Committee (FOMC) meeting and new economic projections. A press conference will also be held with Jerome Powell, Chair of the Fed. Around this event, we can also expect significant fluctuations on the currency market.

In the statement, there should not be any fundamental changes (except probably the adjustment of asset purchase programs). The new projections by Powell may be important for the future fate of the euro and the US dollar, as well as differences from the relatively optimistic (for current conditions) tone of the ECB's president during her speech.

The pound under pressure

Before the Federal Reserve events begin, the ZEW economists' sentiment index for the eurozone will be published on Tuesday and the US retail sales data on Wednesday. If they are a positive surprise, they may strengthen the dollar somewhat. However, it is not likely that there will be any major changes in the market happening before the Federal Reserve events.

The issue of the new trade agreement between the UK and the EU remains a big unknown. Negotiations will resume next week. Therefore, in the case of the pound, supply pressure and increased volatility are expected to continue.

Today, the zloty's quotations stabilize around 4.45 in the case of the EUR/PLN pair, 3.75-3.76 for the USD/PLN pair, 4.13 for the CHF/PLN and around 4.81 in the afternoon (previously even 4.79) for the GBP/PLN. By the end of the day, the fluctuations are likely to be small due to the shift of market attention to next week's Federal Reserve meeting.