Inflation in the US surprises (Afternoon analysis 13.02.2019)

Again, the dreadful data from Europe is in contrast to better than expected readings from the US. Inflation in January, which is 0.1 percentage points higher than consensus, strengthens the dollar. The economic imbalance between the US and the eurozone weakens the zloty and the scale of depreciation may increase even further.

Euro under pressure

It seemed that the euro would regain its breath because of the positive sentiment in the broader market. The EUR/USD quotations rose to around 1.1340 from 1.1260 yesterday evening. However, weak data from the eurozone was published in the afternoon. After the readings from Europe's largest economies, it was not expected that the eurozone would generate an outstanding result. However, the scale of the decline exceeded estimates - production in the single currency area fell by 4.2% per year. This is the worst result in nine years.

For some time now, and this has been highlighted since the middle of last year, a growing gap has been observed between the US economy and the largest economies in Europe. The leaders of the Old Continent are affected by the economic slowdown, which turns out to be more and more profound with practically every macroeconomic publication. In the afternoon, the Bureau of Economic Analysis published data on consumer inflation (CPI) in the USA, in January. Both the main CPI and the core reading (excluding energy and food prices) exceeded market expectations at 1.6% and 2.2%, respectively. Taking into account previously published data from the eurozone, supply pressure on the euro could be increased.

This imbalance is important for the euro valuation in the coming weeks. Data from European economies for January will be particularly important. If it shows that the strong economic slowdown has also shifted to this year, the euro could depreciate even further. A weakening of the euro would most likely increase the supply pressure that is currently observed on the zloty. The zloty basket remains weak. The EUR/PLN exchange rate is about PLN 4.33 and the USD/PLN exchange rate moves to the upper limit of the last 1.5 years. The clear weakening of the Polish currency is accompanied by relatively good (compared to other European countries) macroeconomic readings. Their deterioration in the coming months combined with a weak situation in the eurozone may significantly increase the supply pressure on the zloty.

Tomorrow's preview

Thursday will be important due to preliminary readings on GDP growth in Europe for Q4. At 8:00 a.m., data from Germany will be published, two hours later from Poland and at 11:00 a.m. from the eurozone. With very weak data from the end of 2018 on industrial production in Europe and today's inflation reading from the US, pressure on the euro could potentially increase, if tomorrow's GDP data turns out to be below expectations. This would also be bad news for the zloty, which is already weakened by two important external factors - fear about the economic condition of European economies and a strong dollar appreciation.