Waiting for inflation (Daily analysis 12.06.2018)

The agreement between the USA and North Korea reduces the tension, but it has limited impact on the currency market. The dollar and the zloty are stable, although fluctuations may increase after the publication of the US inflation data in the afternoon.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:30 p.m.: May's CPI inflation in the USA (estimates: core index 2.2% YOY).

ZEW index failed to meet expectations

Before midday, the US President Donald Trump held a press conference in Singapore after his meeting with the North Korean leader. Both leaders signed an agreement assuming, among other things, the complete denuclearization of North Korea. Trump also announced that the US army's war games in the area would be suspended, which would further reduce geopolitical tensions.

In theory, today's agreement is positive for market sentiment, which could slightly increase the risk appetite and strengthen the zloty. Today's meeting and signed agreement, however, are only the beginning of a negotiation process which may take a longer period of time and may face certain problems along the way (given the history of North Korea's cooperation with Western countries). Ultimately, the impact of this event on the currency market will be limited.

In the morning, the ZEW published the index of economic sentiment - it fell to -12.6 pts. for the eurozone (0.1 pts. was expected), which was the worst result in two years. In the case of Germany, it fell from -8.2 pts. to -16.1 pts. (the consensus pointed to -14.6 pts.). Although the sentiment has worsened more than expected, the impact on euro prices was limited. Probably, it was caused by the fact that the Italian Finance Minister has confirmed that no discussion is taking place on leaving the eurozone, which has decreased some of the fears.

As a result, the zloty remained relatively stable. The euro cost about 4.27 PLN and the dollar 3.62 PLN around midday; similar quotations were observed in relation to the franc or the pound. This calmness may be slightly disturbed by the data on consumer inflation (CPI) in the USA, which will be published today. Exceeding the consensus of 2.2% year-on-year by the core inflation index (excluding energy and food prices) by 0.1 percentage point may cause significant fluctuations in the currency market.

An increase in this type of inflation to 2.3% or more would make the scenario of four (or more) interest rate increases this year more likely. This could also send a negative signal to the zloty, which could (like other emerging country currencies) come under pressure due to appreciating dollar and growing yields of the US treasury bonds. It should be noted that Wednesday's Federal Reserve statement may turn out to be hawkish. However, Thursday's statement from the European Central Bank may turn out to be the opposite. This may cause additional pressure on both the euro and the zloty in the second part of the week. In such case, the euro may exceed 4.30 PLN again before the end of the week, and the zloty may lose in relation to the other basic currencies.