US inflation failed expectations (Afternoon analysis 13.09.2018)

The Central Bank of Turkey surprises with higher interest rates and US consumer inflation with a worse result. The dollar is clearly depreciating, despite the fact that the ECB has cut the growth pace of the eurozone for this year and next year.

EUR/USD closer to 1.17

Today at 1:00 p.m., two central banks published their monetary policy decisions. As expected, the Bank of England left both interest rates and the asset purchase program unchanged. This time there were no surprises in the distribution of votes - all members of the monetary committee were in favour of keeping the rates.

In the decision announcement, they pointed out the need to tighten monetary policy if the economy develops in line with the August assumptions presented in the Inflation Report. However, this is subject to Brexit running smoothly and the exit scenario without an agreement will be avoided. Although the fluctuation range has increased slightly, this decision has not had a major impact on the pound's quotations. Brexit-related information will continue to have the greatest impact on the British currency. Recent positive information on this issue should maintain a gradual increase in its value.

Unexpectedly, the Turkish central bank raised interest rates by more than the market expected. The market consensus pointed to an increase from 17.75% to 21%, but it actually came to 24%. Interestingly, this happened just after President Erdogan said during his speech in Ankara that the central bank should lower this high level of interest rates.

The lira, after the President of Turkey's comments, recorded a nearly 2% drop, and one hour after the publication of the central bank's decision, it was gaining nearly 2% against the dollar. Although the increase in rates is positive for the lira, given the current and earlier (even greater) fluctuations, it is uncertain whether these increases will be maintained. Especially as President Erdogan is against such a policy, which may cause concern about his interference in the decision of the central bank.

In turn, the European Central Bank (ECB) did not change anything in its monetary policy communication - it left the rates and the asset purchase program unchanged. The EUR/USD quotations were slightly above 1.16 and within a limited fluctuation range.

At 2:30 p.m., the Bureau of Labour Statistics (BLS) published August's consumer inflation index (CPI) in the USA. Although this is not the Federal Reserve's (Fed) preferred measure of inflation (PCE inflation), its changes also suggest price trends in the economy. In August, core inflation (excluding energy and food prices) fell to 2.2% per year, 0.2 percentage points below both expectations and July's level.

This was the result of a fall in US Treasury bond yields and a fall in the dollar's value. The EUR/USD quotations increased from approx. 1.162 to 1.168. This is the upper limit of the September quotations, although the fluctuation range remains limited all the time.

At the same time, Mario Draghi, head of the ECB, also held a press conference. He pointed out that protectionism has increased in some countries and has worsened the problems of emerging countries. The ECB also lowered the eurozone's economic growth projections by 0.1 percentage points for 2018 and 2019. This may suggest a slightly greater caution of the ECB in the context of a potential decision to increase interest rates. However, Draghi himself has announced that an accommodative (mild) monetary policy will still be required to keep up the rising inflation path.

Initially, the market valued mainly data from the USA. Lower inflation may reduce the chances of rapid monetary tightening. Combined with a weaker dollar and positive sentiment on the market, the zloty was able to go up in green. The EUR/PLN pair fell around the 4.30 boundary and the USD/PLN fell to approx. 3.684.

Deterioration of the eurozone's GDP growth forecasts and anxiety about trade war or (unfavourable) changes in emerging markets were insufficient to overshadow lower than expected inflation in the USA. On the other hand, a single inflation reading is not enough to lower the current pace of expected interest rate increases. If the dollar remains under pressure also in the second part of the day, when US investors will be more active, the zloty should maintain the current increases.

Tomorrow's preview

In the context of today's market events, tomorrow's macroeconomic publications may have a limited impact on main currency quotes.

At 2:30 p.m., the Census Bureau will publish US retail sales data for August. The median of market expectations indicates an increase in sales, excluding vehicles, of 0.5% in August compared to the previous month. Retail sales may suggest consumption level in the economy, which in turn, is the largest component of GDP.

At 3:15 p.m., the Federal Reserve will present August's data on industrial production in the USA. The market consensus indicates an increase of 0.3% on a monthly basis, similarly to its main component, i.e. manufacturing.

The University of Michigan at 4:00 p.m. will publish preliminary data on the US consumer sentiment index in September. In August, the index surprised positively (96.2 pts vs. 95.5 pts expected) and this month this trend is expected to continue - the consensus indicates a further increase to 96.9 points.

The most significant recent data from the USA have been mainly positive. A good result from the aforementioned publications would only strengthen the argument for the stronger dollar. This could also increase the pressure on the zloty.