Zloty is dropping (Afternoon analysis 31.10.2018)

October's consumer inflation in Poland is lower than expected and weakens the zloty. The dollar appreciation is also responsible for this. The EUR/USD quotations are getting closer and closer to falling below 1.13.

Inflation in Poland the lowest since June

The data published today by the Polish Central Statistical Office (GUS) indicated lower than expected inflation in October, which amounted to 1.7% per year. This is a continuation of macroeconomic data from the Polish economy, which does not support interest rate increases. The data regularly fails to meet market expectations, suggesting a faster than expected economic slowdown.

The zloty's condition would not be so bad if the dollar was not so strong. The main currency pair's quotations, i.e. the euro to the dollar, fell to around 1,131. A decrease below the 1,13 limit and the new half-yearly lows seems to be more and more real. The economic slowdown in the eurozone is another factor which also has a negative impact on the Polish economy and also on the zloty.

The EUR/PLN quotations exceeded 4.34 today, reaching the highest level in two months, similarly as the USD/PLN quotations approaching 3.84, and this is its upper limit since the beginning of May last year. Unfortunately, the incoming data, both internal and external, is not favourable for the Polish currency.

Today there is a good sentiment in the global equity market. At around 4:00 p.m., practically all main market indexes in Europe and the USA record over 1% profits. A greater appetite for risk may protect the zloty against a deeper discount, although the further fate of its quotations will depend primarily on the dollar's behaviour. Its appreciation in the second part of the day may increase the sales pressure on the zloty and we can observe the new highs in basic currency exchange rates in relation to the zloty.

Tomorrow's preview

At 1:00 p.m., the Bank of England will publish a statement after the two-day meeting. It is practically certain that interest rates will not be changed. The market consensus indicates that all members will vote to keep them unchanged. In the statement itself, we will probably not find any new information compared to the previous month. The British Central Bank will rather repeat that monetary policy in the longer term depends on Brexit and the form it takes.

For the pound quotations, a report on inflation will be more important where there will be, among other things, the inflation forecasts for subsequent periods. Recently, we have observed a downward trend in consumer price growth in the British economy. A decrease in the inflation expected by the Banks of England may increase the supply pressure on the pound, especially now, when we are observing the appreciation of the dollar.

The US currency could, in turn, receive another positive stimulus tomorrow in the form of an ISM industrial PMI. Although the median of market expectations points to a decline of 0.8 points to 59.0 points, this is still the upper limit of the readings of this index over the last 35 years. Given the rapid pace at which the US economy has grown in recent quarters, the chances of a significant decline in this index are very limited. On the other hand, its rise above expectations could strengthen the dollar, given the economic downturn in the eurozone.