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INVESTINGWeaker Data Ignites "Rate Cut Play" on Wall Street, Gold and Euro Gain

The strength of the dollar, which we witnessed following Tuesday’s inflation report, was erased over the next two days. The currency mainly lost value due to poorer retail sales data and industrial production. Regional business cycle indicators grew and weekly job market data did not generate any major negative signals. The EUR/USD exchange rate once again approached 1.08, even though Friday morning’s quotations are at 1.0760. Wall Street was again colored green yesterday. Oil, as well as gold, gained. From Poland, we received the CPI reading for January.

Weakened retail sales to some extent resulted in market hopes for an imminent U.S interest rate cut being reinforced, although this is not reflected in the valuation of futures contracts. In the case of these data, we received a decrease of 0.8 percent month on month, which is a much worse result than Bloomberg’s estimates. The January result is the worst in nearly a year. The sale of cars, for example, performed poorly, as did the demand for building store products. This can be partially explained by worse weather. The result excluding cars also disappoints; we see a decrease of 0.6 percent month on month. The slim version of sales also performed poorly, which is used to prepare GDP estimates. January indicated a decrease of 0.4 percent here. The negative image of the American economy was reinforced by industrial production, which shrank by 0.1 percent month on month. Weekly job market data was peripheral and a result of 212 thousand new jobless claims stirred no emotions.

Yesterday’s session on Wall Street was positive, worse data turned out once again to be better for the market, which continues to “play” for interest rate cuts by the Fed. Neither the Nasdaq Composite nor the Dow Jones or SP500 set new historical records, but they definitely approached this pivotal area again. The German DAX once again entered uncharted territory, which this morning is again gaining and “touches” the level of 17,200 points.

A weaker dollar resulted in the EUR/USD exchange rate once again nearing 1.08. In my opinion, this specific level is crucial in the short term. Horizontal resistance and a downward trend line run here. USD’s weakness was exploited by gold, which is again above the psychological barrier of $2000/ounce.

Domestic data worth noting is January’s CPI inflation, which showed a stronger decline than forecasted. The dynamics at 3.9 percent year on year is the lowest since March 2021. The drastic drop from the level of 6.2 percent year on year in December was largely due to energy carrier prices, which grew significantly less compared to January of 2023. We are dealing with a high base here, hence the huge scale of change. “Core” components lowered inflation but to a much lesser extent.

A rate cut by the Polish Monetary Policy Council in March is in my opinion unlikely. The central bank’s cautious approach will be advocated by the possible rise in inflation in the second half of the year, so the Council should be dominated by the conviction to remain on a restrictive path.

The Polish zloty this week is weaker (against the euro and the USD) primarily due to Tuesday’s inflation data from the U.S. The zloty gained slightly against the dollar in the last two days and the USD/PLN rate shows the vicinity of 4.03. The EUR/PLN exchange rate is currently 4.34

Łukasz Zembik Oanda TMS Brokers.

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