US inflation fails again (Afternoon analysis 11.10.2018)

US inflation data for the second consecutive month, awaited by the market, clearly below market consensus. However, they will not change the pace of monetary tightening. The slightly weaker condition of the dollar supports the emerging currencies, including the zloty.

Main currency pair close to 1.16 again

Continued price reductions on the share market had no significant impact on the currency market. The news of the day was data from the Bureau of Economic Analysis (BEA) on consumer inflation (CPI) in the USA in September. Its most important core index (excluding energy and food prices) for the second month in a row failed to meet market expectations with an annual reading of 2.2%, while consensus was 0.1 percentage points higher.

The first reaction was the sharp weakening of the US currency. The EUR/USD quotations increased from 1.157 to 1.16 at the time of publication. After 3:00 p.m., however, the movement was completely reversed. The data, although worse than expected, is not disappointing enough to change expectations as to the pace of monetary tightening in the USA, and if the category of used cars were to be excluded, the reading would be in line with the consensus.

The slight dollar weakening can be combined with a discount on the US market, which, in theory, could mean an economic slowdown and consequently lead to a slowdown in the growth pace of interest rates. However, such a scenario will be difficult to implement, given that the discount on the US market is a correction of the very large increases that the indexes have recorded this year (and also in the context of the last few years).

Very weak sentiment on the share market this time did not have a negative impact on the zloty, which, like most emerging countries' currencies, even slightly appreciated. This is a consequence of yesterday's events not being accompanied by a strengthening of the dollar, which often occurred in such cases. However, we can quickly return to a scenario in which the US indexes will gain with a simultaneous appreciation of the dollar, which will support the argument of rapid monetary tightening.

The calendar of scheduled events for the rest of the day is practically empty. Therefore, with the zloty relatively resilient to share market events, if no significant changes in the valuation of the euro to the dollar are observed, the zloty basket should remain stable.

Tomorrow's preview

At 11:00 a.m., the European Statistics Office (Eurostat) will publish data on industrial production in the eurozone in August. Taking into account the recent scale of the stock market discounts, the quotations of the main currencies remained relatively stable. Although the dollar has lost a little to the euro, given that the common currency has seen a fall in the last two weeks, these have so far been slight changes. Industrial production data can have an impact on the euro, especially as July's data significantly disappointed market expectations. Production recorded its first year-on-year decline in two years (by 0.1%). The median of market expectations indicates a further decline to 0.2% per year. An increase in industrial production in the eurozone in August clearly above 0 (and close to 1%) could slightly strengthen the euro and at the same time provide additional support for the zloty.

At 4:00 p.m., the University of Michigan will present preliminary estimates of the US consumer confidence index in October. The market consensus shows a slight increase from 100.1 points to 100.4 points. However, this publication, even if much higher, can be ignored by the market. The consumer survey was conducted even before the decline on the market, which will almost certainly affect the index.