The strongest drop in inflation in over 60 years (Afternoon analysis 12.05.2020)

The extremely uneven impact of the pandemic on US prices in April: fuels are more than 30% cheaper, and eggs are about 16% more expensive. The dollar is depreciating during the afternoon trade, but changes are still within a limited fluctuation range.

Food prices go up

On Tuesday afternoon, the dollar continued to weaken. In the morning, the US currency was already under slight supply pressure, which however increased slightly after inflation data from the Bureau of Labour Statistics (BLS) in the USA. Consumer inflation (CPI) in April fell to 0.3% per year, from 1.5% in March. In turn, the core index (excluding energy and food prices) decreased to 1.4%, the lowest level in 9 years.

The scale of the drop and the impact of the pandemic on price trends are underlined by monthly price changes (excluding energy and food): the 0.4% drop was the biggest since 1957. However, the disturbance caused by the restrictions is also visible in the food price trends, whose average growth has been the strongest since February 1974 (1.5% on a monthly basis, 3.5% on a yearly basis). There were also significant discrepancies here, e.g. fresh vegetables and fruit went up by only 0.4% a year, while dairy products by 6.8% and eggs by 16.1%.

However, the rise in food prices is a one-off increase wave due to the accumulation of stocks by consumers. The restrictions imposed in response to the coronavirus pandemic will be deflationary in nature (prices of fuels, energy carriers and air tickets have fallen by about a third), so interest rates will also remain at the current level (0-0.25%) for a longer period of time.

It will be a similar development to what we see in most regions of the world, which is also confirmed by the incoming macro data. It remains unknown, among other things, how long the path to economic recovery will take. The first months will be characterised by relatively strong increases in activity, but the projections for the end of this year and 2021 are currently subject to a considerable degree of uncertainty.

EUR/USD closer to 1.09

The market is still dominated by positive sentiment. This is partly linked to the gradual opening of the economies and the ongoing activities of central banks providing more liquidity to the market (from now on, the Fed buys ETFs). Recent macro data do not support the dollar's appreciation. On the contrary, the foreign exchange market remains within a relatively narrow fluctuation range (at least in the case of the main currencies).

The EUR/USD exchange quotations increased about 0.6% in the afternoon compared to yesterday's closing and were just below the 1.09 limit about an hour after the start of the session on the New York Stock Exchange. This caused a drop in the USD/PLN exchange rate to about 4.19, but these changes should be considered rather as "very limited", as well as the narrow EUR/PLN volatility range of about 4.55-4.56.