Zloty remained week (Afternoon analysis 16.03.2018)

Macroeconomic data didn’t help the zloty today. Industrial output in the US increased at the fastest pace in 7 years in February – the dollar visibly gained.

EUR/USD falls below 1.23

Zloty’s value didn’t change much today, however, the continuation of the weakness seen in recent days could be observed. Yesterday, consumer inflation failed to meet market expectations and was the lowest since the end of 2016 (1.4% year-on-year). And today, data on average earnings in the corporate sector grew less than expected highlighting a lower than expected pressure on prices (6.8% vs. 7.3%). Although a weak core inflation reading was to be expected, a number below 1% most certainly didn’t help the Polish currency.

According to today’s publication from the National Bank of Poland (NBP), the core inflation index fell in February to 0.8% year-on-year (from 1% a month earlier). This was also the lowest level since October 2017. On the bright side, January’s current account surplus surpassed market expectations with a reading of +2 billion euro (a surplus of 1.6 billion was the consensus). On the other side, however, a stronger January reading was to be expected after a significant deficit in December (1 billion euro). NBP data also show that the current account was strongly supported by an inflow of EU funds (there was a deficit on the trade account, albeit smaller than in the Central Statistical Office data).

This was, however, the end of good news for the zloty. After the Federal Reserve’s publication regarding the industrial sector, the dollar visibly gained. Industrial output grew by 1.1% on a monthly basis in February, while a gain of 0.3% was expected. It also increased by 4.4% when compared to the same month of the previous year, posting the biggest year-on-year gain in 7 years. As a result, the main currency pair (EUR/USD) fell to approx. 1.228, which was the lower boundary of the last two weeks trading.

Both external data and from the Polish economy didn’t support the zloty today. The Polish currency will probably remain under pressure until the end of the day. Its condition could potentially be worsened by a deterioration in market sentiment. Geopolitical tensions combined with an appreciating dollar could pressure the equity market in the US. Should the main indexes in the US post declines, this could translate into higher risk aversion, hurting the Polish currency, among others. In such a scenario, the price for the euro could exceed 4.22 PLN, while the price for the dollar could move up to 3.44 PLN.

Next week’s preview

Next week could prove interesting. Macroeconomic data from the industry and retail sector in Poland in February will be published on Monday. Zloty has been under pressure from low inflation and decreased the probability of tightening of monetary policy. Another portion of weaker than expected data could invoke further selling pressure on the Polish currency as the market consensus currently points toward a growth in industrial output by 8.1% and retail sales by 7.3%, both on a yearly basis.

The next day could be on the other hand vital for the pound. February’s consumer inflation data from the British economy will be published – it has been above the 3% mark since September 2017. As the growth rate of the average wage of Britons has been below this level, their salaries in real terms have been decreasing. With a moderate growth rate of the economy, this could lead to fear of stagflation. The median of market expectations suggests an inflation reading of 2.8%. Should it remain above 3%, the pound could appreciate, however, it could be a deteriorating factor for the whole economy in the long term.

Probably the most important event of the week will take place on Wednesday. FOMC will most probably decide to increase the main interest rate by 25 bp to 1.75%. The rate increase is widely expected by the market, hence the focus could be on assessing the probability of four (or more) rate increases in 2018. This will also be the first monetary policy meeting of the new Federal Reserve chief – Jerome Powell with the addition of three new-coming members. A hawkish tone coming from FOMC could spark a dollar appreciation and contribute to a deterioration of the market sentiment. Such circumstances have generally been negative for the zloty. Taking into account its recent weakness, the Polish could be under heavy pressure in the aforementioned scenario.