Zloty pares some losses (Afternoon analysis 10.05.2018)

Lower than expected core inflation in the US weakens the dollar clearly. The zloty benefits from a better global sentiment and from the worse condition of the US and British currencies.

Weaker dollar and pound

As expected, the Bank of England left the interest rates unchanged. The distribution of votes was also in line with the consensus (7 for maintaining them unchanged, 2 for increasing). However, the pound incurred some losses and may be subject to further pressure. Why? Together with the decision, May's inflation report was published, which indicated that the inflation processes started to slow down faster than the bank had expected.

March's inflation rate in the UK economy of 2.5% per year was lower than in the previous Inflation Report (February). Now, in May, the forecasts have been lowered from 2.7% to 2.4% in the case of Q2 this year, from 2.2% to 2.1% in Q2 of next year and from 2.1% to 2.0% in 2020. As a result, this could put negative pressure on the British currency, as market expectations for any increase in interest rates in the Islands this year have fallen sharply.

However, publication of April's consumer inflation index (CPI) in the US was the most important event of the day. According to data from the Bureau of Economic Analysis (BEA), inflation amounted to 2.5% year-on-year, so was in line with economists' estimates. However, much more significant core inflation (excluding energy and food prices) was 2.1%, 0.1 percentage point below the market expectations. Also on a monthly basis, the price increase turned out to be weaker than the consensus (0.1% vs. 0.2%).

The dollar depreciated after the BEA data. The main currency pair (EUR/USD) rose again above 1.19. Although the dollar has been relatively strong in the last three weeks, today's inflation reading means that the chances of four (in total) interest rate rises this year in the US are falling. This may weaken or hamper the current appreciation trend in the US currency.

Lower than expected core inflation in the US and the weaker dollar are positive for the zloty. The Polish currency already appreciated before the data from the USA due to the improvement of global sentiment towards the currencies of emerging countries. The zloty gained in relation to practically all the basic currencies. Over 1% appreciated in relation to the globally weaker dollar and pound - the British currency was about 0.10 PLN cheaper than during yesterday's highs.

Tomorrow's preview

There are no significant macroeconomic publications scheduled for tomorrow. It seems that the market will focus more on today's inflation data from the US and the UK, and the data will probably dictate the market sentiment on Friday as well.

At 4:00 p.m., the University of Michigan will publish preliminary data on its consumer confidence index for May. The median of market expectations indicates a slight decrease - from 98.8 to 98.5 points. However, this would still be a result close to that observed in March this year (102 points). Probably only the result above the consensus by about 4 points could cause some reaction on the market, although even this one would probably have a limited impact on the currency market.