The end of the month traditionally brings preliminary inflation data. While Poland’s price dynamics don’t significantly influence domestic monetary perspective, inflation readings from the eurozone, particularly Germany, are crucial drivers for global markets. Are we on the brink of a quick path to interest rate cuts in major economies?
Hawks Will Find Food
Poland’s inflation in August surprised slightly on the upside, but the effect was not as significant as the July jump associated with the deregulation of electricity prices (as confirmed by the author’s electricity bill). The latest CPI index is 0.1% on a monthly basis and 4.3% on an annual basis. This definitely marks a farewell to inflation within the target set by the National Bank of Poland (NBP) (2.5% +/- 1%) for several quarters. As to be expected, today’s reading had a limited influence on the rates of the zloty (although strengthening of the domestic currency was noticeable immediately after publication). Market consensus increasingly suggests that the Monetary Policy Council (MPC) may decide to cut interest rates only in the second half of next year. With expected monetary easing from the most important central banks (ECB and Fed), this situation should fundamentally support the zloty in the coming months.
Closer to the Target
Eurozone inflation came as no surprise and clearly decreased to 2.2% on an annual basis, the lowest result in three years. This result finally cements expectations of a September interest rate cut in the eurozone. Nevertheless, investors have long been convinced of a 25bp cut at the next meeting, therefore today’s reading had no impact on EUR/USD rates. Particularly as yesterday there was a tumble in the quotes for the pair, all because of inflation data from Germany. However, not for the entire Federal Republic, but for individual constituent states, which positively surprised with lower results. Lower price dynamics coupled with economic issues (lack of GDP growth in the second quarter) on Europe’s largest market may prompt the ECB to implement quicker monetary easing. Decision-makers meet on September 12th.
First Step (but not Leap) Fed?
The most important reading of the week is perhaps Fed’s preferred inflation measure, the PCE. Important as while the market is certain of the scope of ECB’s cuts, there’s still speculation about the scale of FOMC’s cuts. Before today’s announcements, future rate contracts indicated a 30% probability of a 50bp move at the Open Market Committee’s September meeting. But this scenario won’t be supported by the latest PCE reading. Americans’ July spending went up on an annual basis by 2.5% (thereby aligning with the previous result), with expectations at 2.6%. The currency market, however, seems to be supporting the dollar in its initial reaction. The EUR/USD rate is trying to drop below $1.105, which translates into at least a temporary weakening of the PLN. The euro rate is grappling with PLN 4.28, the dollar rate is looking at PLN 3.87, the franc rate is at PLN 4.55, and the pound rate is close to PLN 5.09.
Author: Adam Fuchs, Currency Analyst at Walutomat.pl
Source: https://managerplus.pl/inflacja-w-centrum-uwagi-33858
