Very variable situation (Afternoon analysis 09.02.2018)

Significant fluctuations on the market and the dollar have been observed. However, the zloty remained in a relatively good condition despite market sentiment. Next week will be crucial for the currency market.

Zloty in relatively good shape

During today's session, a deterioration in European market sentiment was observed. After falling by 3-4% yesterday in the US, the European counterparts lost almost 2%. The index of the largest 30 German companies has given up all profit earned since 6 September last year.

Around an hour before the US session started, both European indexes and futures in the US have pared some of their losses - a few minutes after the session started, indexes rose by about 1%. However, last week's uncertainty suggests that today, significant market fluctuations can be seen.

The dollar's quotations were subject to sentiment volatility. For the market, it will be difficult to assess whether the rapid changes in the share and bond markets are positive for the dollar. As a result, the main currency pair quotations (EUR/USD pair) moved between 1.22 and 1.23. Before 2.00 p.m., the dollar's appreciation caused a sharp drop on the popular "cable", i.e. GBP/USD pair. Today it fell below 1.38 for the first time since mid-January.

This is a result of worse than expected macroeconomic data from the British economy as in December, the industrial production and foreign trade deficit turned out to be much worse than expected in December (the latter rose to the highest level for just over a year). This was also due to comments made by Michel Barnier, an EU negotiator, who said that if the transitional period for the UK after leaving the EU was not so certain if there were still misunderstandings (between Theresa May’s government and the EU).

The global pound weakening caused the situation where yesterday's appreciation in relation to the zloty was almost completely reversed. The British currency fell from nearly 4.78 PLN to about 4.72 PLN. It is also due to the relatively good zloty condition. Despite worse market sentiment, the Polish currency remained relatively strong. The EUR/PLN quotations after rising above 4.20 (the most since December) fell below 4.19. If we do not observe a sentiment worsening again during the US session, the zloty quotations may end the week around the current levels.

Next week's preview

Next week will be crucial for the currency market due to January's data on consumer inflation (CPI). On Tuesday, data from the British economy will be published (inflation was around 3% in recent months). The median of expectations indicates a reading of 2.9% per year. However, data on core index, i.e. excluding energy and food prices, may be more important. From August to November, core inflation remained at 2.7%. In December, it fell to 2.5%, slightly more than expected, however, the market consensus estimated it to fall to 2.6%. That is also what market attention is likely to be focused on. Taking into account the significant pound fluctuations (i.e. the Bank of England's statement, concerns about the Brexit process), the deviation from the reading by 0.1 percentage points may cause its significant reaction.

Over the next day, the most important publication of the week will be published. The BEA will provide data on consumer inflation in the USA. In the case of both the main inflation and core inflation index, December levels of 2.1% and 1.8% respectively are expected to remain unchanged on an annual basis. As in the case of the pound, if BEA data differs from market expectations, a significant dollar reaction may be observed. However, the rapid change in the dollar's value is likely to affect the entire currency market. A reading above consensus (especially in the case of core inflation) may significantly accelerate dollar appreciation. The currencies of the emerging market, including the zloty, which has already lost some of the profits generated in recent weeks, may depreciate.