Weaker zloty (Daily analysis 13.03.2018)

The market is waiting for US inflation data. Trading on the EUR/USD was disrupted by the ECB official comments. The zloty remains under pressure while the EUR/PLN is quoted close to 4.21 level.

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

• 13:30: US CPI readings for February (survey: 2.2% y/y and 0.2% m/m; core inflation: 1.8% y/y and 0.2% m/m).

Waiting for inflation data

Trading on the EUR/USD has been fairly stable since the morning. Despite the fact that the main currency pair has tested levels around 1.23500 after comments from one of the ECB officials (Philip Lane) concerning the common currency. It seems that investors are rather prone to waiting for US inflation readings that extend moves on the ECB message.

There has been a discussion on the market for some time whether the European monetary authorities are concerned about the inflation target fulfillment due to the strong euro. This discussion was also put forward after comments from Lane. The Irish ECB member told Bloomberg that there was “no concern about the current euro level”. Even though he also stressed that “if it moves a lot within a short time interval, then we have to think about implications” the overall message showed limited concerns about FX moves.

After the comments, the EUR/USD rose to 1.2350 level, but the gains around 20-30 pips were quickly pared. It is likely that investors are more prone to reacting to today’s inflation readings from the US. Economist consensus shows a 2.2% y/y reading for February and 1.8% y/y when we exclude more volatile components such as oil and food.

Core inflation is expected to be broadly analyzed by investors. Its slide from 2.3% level seen just a year ago was one of the main events which probably pushed the dollar lower. Taking into account the economists individual projections, it seems that the surprise may be rather on the upside, 1.9% y/y, than on the downside.

However, it is worth noting that last month we had a significant acceleration of apparel prices (1.7% m/m) and medical services (0.6% m/m). Somewhat slower gains of these components may create some strong headwinds to a strong upside surprise to the core CPI (for example, to 2.0% y/y). Finally, the data may be moderately above consensus, but the odds of a significant move remain low. As a result, there is also a low probability that after the data the dollar will strengthen markedly.

Further zloty weakness

For several days we have stressed that internal weakness pressure on the zloty may strengthen (comments from the MPC, data on foreign trade). Moreover, the zloty uses fairly low-level impulses from the global markets (for example, Lane’s comments) to extend its weakness. It may also suggest that there is more room for further PLN weakness.

Regarding the US data impact on the zloty, it seems that higher than expected core CPI reading may be negative for the currency. It may not only push the dollar higher but also bring the EUR/PLN above the 4.22 level to new three-month highs.