Zloty under pressure (Afternoon analysis 21.03.2018)

Retail sales in Poland rose by 7.9% year-on-year in February, exceeding market expectations. However, this was not enough to strengthen the Polish currency. The FOMC's message, which may be hawkish, on the future level of interest rates may cause additional pressure on the zloty.

Positive data but the zloty remains weak

Today, the Polish Central Statistical Office (GUS) published data on retail sales in Poland. It continued to grow at a strong pace in February, and although the yearly growth rate of 7.9% was 0.2 percentage points lower than in January, it exceeded the market expectations of 7.3%. Although in theory, it is good news for the Polish economy (it maintains positive perspectives of the economic growth rate), it had a neutral impact on the Polish zloty.

The zloty remains under downward pressure caused by monetary tightening this (and the following) year. It is particularly visible in the context of the USA, where interest rates are already likely to rise. Also in the eurozone, the monetary policy may be tightening (potential end of the asset purchase program at the end of the year or expectations for rate hikes in Q1 of next year). Taking into account the dovish attitude of the Polish Monetary Policy Council, pressure on the zloty may be expected in the coming months.

Today, it led to a weakening of the Polish currency - one euro cost 4.24 PLN, the most since mid-November last year, and one pound cost 4.86 PLN, which was the highest value since the beginning of October. The dollar, in turn, fluctuated around 3.45 PLN, close to three-month highs. However, the Polish currency may incur more losses in the afternoon.

This may be caused by the statement and press conference from the FOMC (Federal Open Market Committee). Given the new president and the change in the rotating members of each state, the message may be relatively hawkish, which would support the dollar and could weaken the zloty. Even if the median of member's expectations did not indicate four rate rises this year, an increase to three for 2019 may be enough to eventually trigger dollar appreciation.

Tomorrow's preview

Tomorrow, preliminary March readings of PMI indicators for France, Germany and the eurozone as a whole (at 9 a.m., 9.30 a.m. and 10 a.m. respectively) will be published. In all cases, for both the manufacturing and the services sectors, a slight fall in these indexes is expected. At 10 a.m., data on Ifo climate index will be released, which may also fall (the market consensus indicates a decrease to 114.8 pts., by 0.6 pts).

On the other hand, yesterday's sharp fall in the ZEW sentiment index for Germany caused by a potential customs war with the USA may mean that the Ifo index will face a similar fate (although it is subject to smaller fluctuations than ZEW). Although the most important event for the market will be today's FOMC decision on interest rates in the US and is likely to be still discounted tomorrow, a slowdown in the growth pace and sentiment in the eurozone may contribute to a worsening of the general sentiment in the market.

If today's message from FOMC is relatively hawkish, this could put pressure on the stock markets and the euro. In such conditions, the zloty may lose some of its value, taking into account the lower chances of monetary tightening this year in Poland.

At 1.00 p.m., the decision of the Bank of England concerning the interest rates and bond purchasing program will be published. In both cases, no change is expected, and the market consensus indicates that all members will vote to keep the rates unchanged. Recently, inflationary pressures eased in the UK economy, which may reduce the possibility of monetary tightening. Therefore, the attention will probably focus on assessing whether it can be postponed. However, the chances of a significant change in the perspective of interest rate changes seem to be limited. The pound's valuation should still be affected by Brexit issues.