The zloty remains strong (Afternoon analysis 30.07.2018)

A slightly weaker dollar and a lower risk of new tariffs helped the zloty, which today gained in relation to most currencies. However, the week is full of macroeconomic publications, which may significantly increase the volatility.

EUR/PLN below 4.28

The first day of the week turned out to be positive for the zloty. The Polish currency continued the appreciation trend of last week. Today, EUR/PLN prices have dropped to approx. 4.274, which is the lower price limit of the last 1.5 months, and the zloty also gained 0.2-0.3% in relation to other major currencies. The reason for its good condition can be seen in the warming of EU-US relations in terms of trade, as well as in the slight weakening of the dollar. Recent good data from the Polish economy concerning industrial production and retail sales also contribute to the better sentiment towards the zloty.

It seems, however, that given the events planned for this week on the market, today's quotations may ultimately have a relatively small significance. And probably the most important publication will take place on Friday when we will get to know the data from the US labour market report. The market's attention will be focused on the average salary - its strong growth may cause dollar appreciation and have a negative impact on the zloty.

The Polish currency, although supported by good news from within the country and on international trade, has limited potential to increase its value. One of the limiting factors it is the dollar, which will most probably be gaining in the long term, given the rising interest rates in the US.

Tomorrow's preview

On Tuesday, the most important data for the currency market may turn out to be the data on inflation, among others, for Poland, the euro area and the US.

At 10 a.m. the Central Statistical Office (GUS) will present the level of consumer inflation (CPI) in Poland in July. The median of market expectations indicates an annual increase to 2.1% (from 1.9% in June). An average increase in prices at this level (or higher) would confirm the upward trend observed in recent months and could support a relatively good condition of the Polish zloty of late.

However, external factors will remain relatively more important for the Polish zloty. Eurostat will publish the corresponding figures for the euro area at 11.00 a.m. According to the market consensus, inflation is to remain at the level of 2.0% per annum. Its more important core index is projected to increase by 0.1 pp y/y to 1.0% y/y. It is known that interest rates will not be raised in the euro area for at least one year. However, keeping core inflation at or below 0.9% may put pressure on the euro, further reducing the likelihood of potential rate increases.

Three and a half hours later, the Bureau of Economic Analysis (BEA) will present PCE inflation data in the US in June. The Federal Reserve takes into account this type of inflation that its projections. Market expectations indicate that its more significant core index will remain unchanged at 2.0% per annum. Deviations from this level, even by 0.1 percentage point, may cause significant fluctuations on the dollar. An increase to 2.1% would mean new 6.5-year peaks and would most probably contribute to a significant appreciation of the US currency, at the expense of the zloty.