Zloty pares its losses (Afternoon analysis 30.05.2018)

The market is rebounding - the euro and the zloty - are paring some of their losses. Inflation in Germany surprises positively and increases chances for higher than expected inflation in the whole eurozone. The GDP in the US was lower than expected in Q1.

EUR/USD again above 1.16

After two days of high aversion to the risk, today on the broad market a rebound was observed. The yields of the Italian government bond have moved a little further away from yesterday's highs, main stock indexes in Europe have been appreciating and the euro regained yesterday's losses against the dollar. However, the situation in Italy is unlikely to improve and the new elections will continue to create uncertainty on the markets, especially as populist parties may receive more support than in the previous elections.

In the afternoon, the Federal Statistics Office (Destatis) presented preliminary data for consumer inflation (CPI) in Germany. In May, the CPI amounted to 2.2% year-on-year, by 0.2 percentage points more than expected. This is the highest level for a little over a year - although among the main categories energy prices increased the most (by 5.2%), prices in services also increased strongly - by 1.9%yearly comparing to 1.5%. Therefore, the likelihood that the eurozone's inflation data published tomorrow will also exceed the consensus has increased, even for a relatively more important core index.

On the other hand, the second reading of the growth rate of the U.S. GDP in the first quarter turned out to be worse than expected. Economic growth was revised from 2.3% y/y to 2.2% y/y. Consumers' spending in Q1 (1.0% vs. 1.1%) was also marginally weaker than preliminary data. However, the response to this set of data has been limited so far. Even before their publication, the euro/dollar exchange rates were clearly on the rise, with the EUR/USD exchange rate rising to around 1.165, reversing all losses incurred yesterday.

On the other hand, the second reading of the US GDP growth pace in the Q1 turned out to be worse than expected. Economic growth was revised from 2.3% year-on-year to 2.2% year-on-year. Consumers' spending in Q1 (1.0% vs. 1.1%) was also slightly weaker than the preliminary data. However, the response has been limited so far. Even before the publication, the euro/dollar exchange rates were clearly appreciating, with the EUR/USD exchange rate rising to around 1.165, paring all losses incurred yesterday.

Better market sentiment has also helped the emerging countries' currencies, including the zloty. Today, the Polish currency appreciated, as was the case with the EUR/USD pair, by paring most of yesterday's losses. However, it should be noted, that the political situation in Italy may increase risk aversion in the coming months, which may have a negative impact on the zloty's listings.

Tomorrow's preview

Probably, tomorrow's publication on inflation in the eurozone and in the US will be the most important. Eurostat will present preliminary consumer inflation data (CPI) for the single currency area at 11.00 a.m. The median of market expectations indicates an increase in the headline index to 1.6% a year (compared to 1.3% a month earlier) and a more significant core index to 1.0% (from 0.7%).

The higher level of average prices may be mainly the result of a relatively low base last year, and not the progressing positive price trends. It seems that the recent weakening of the euro, the core inflation data exceeding the market consensus by as much as 0.1 percentage point by may cause the euro to appreciate.

At 2:30 p.m., the Bureau of Economic Analysis (BEA) will publish PCE inflation data for April (the type of inflation that the Federal Reserve takes into account when making its inflation projection). The market consensus assumes that the core index will fall from 1.9% to 1.8% per year. As in the previous case, the deviation by 0.1 percentage point from expectations may contribute to significant dollar's fluctuations in the market. In the context of the zloty, the worst case scenario would be higher than expected inflation in the US and lower than expected inflation in the euro area. This would lead to a decrease in the EUR/USD exchange rate and an increase in the yield of the US Treasury bonds, which would ultimately have a negative impact on the whole zloty's basket.