Dollar shows its strength (Afternoon analysis 14.12.2018)

The euro's sale off after weak PMI data is leading the dollar to new monthly highs in relation to the euro. Despite weak market sentiment, the zloty's decline is limited, mainly in relation to the dollar and the franc.

EUR/USD below 1.13

Today, the euro depreciated after weaker than expected PMI data from the eurozone, Germany and France. However, the situation was different for the dollar. The weak data from the eurozone was accompanied by better than consensus data on retail sales, which increased by 0.2% per month in November. In addition, October data was revised upward by 0.3 percentage points. The more significant reading of the core index (excluding vehicle sales) was in line with expectations at +0.2% month-on-month, but October data was also revised upward, also by 0.3 percentage points.

This publication deepened today's falling prices of the main currency pair, i.e. the euro to the dollar, to about 1.127 - the lower price limit of last month. On the other hand, the dollar index (DXY), which measures its condition in relation to the six main currencies, rose to about 97.72 points. This is the highest level since May 2017.

Mixed data for the dollar came later from the Federal Reserve. Although the US industrial production increased by 0.6% on a monthly basis in November, the reading was expected to be 0.3 percentage points lower. However, due to the fact that October data was revised downward by 0.3 percentage points, it meant that in October production dropped by 0.2%. This will probably weaken the dollar appreciation, which we have observed so far, although strong pressure on the euro should remain until the end of the day.

Today's Eurostat data on average wage growth in the eurozone was of little importance for the market, and probably for the chairman of the European Central Bank (ECB), Mario Draghi. In Q3 it increased by 2.4% against 1.9% in Q2. This is a factor which Draghi reminds us of at almost every press conference after the ECB meeting, claiming that it is supposed to support a return of inflation to the target level. In the long run, this is a positive factor for the euro, as it limits the chances of Mario Draghi's easing the message. Today, however, it has been overshadowed by PMI data.

The sharp depreciation of the euro and the dollar appreciation did not cause significant pressure on the zloty, which remained stable. The EUR/PLN exchange rate continued to be around 4.30, a level repeated this week. The increase in the dollar was limited to the USD/PLN pair, which today increased above 3.81, to the upper limit of last month's quotations. The CHF/PLN exchange rate also increased slightly above 3.82, although this was mainly due to the capital outflow to the franc as a result of a worsening sentiment on the equity market. However, if we do not observe a deepening of the euro declines and appreciation, the zloty should stabilise around current levels. The rebound of the dollar appreciation and increases in the markets could slightly strengthen the Polish currency in relation to the dollar and the franc.

Next week's preview

Even the beginning of the week may be important for the zloty. On Monday, the National Bank of Poland will publish data on core inflation (excluding energy and food prices), which illustrates price trends in the economy better than the headline inflation rate. The market consensus indicates annual growth of 0.7% in November (vs 0.9% in October). A weaker than expected reading could only strengthen the argument for some MPC members to keep interest rates unchanged throughout the following year. A day later, the Central Statistical Office (GUS) will present data on the pace of wage growth in the Polish enterprise sector. In the context of recent weak data from the eurozone and still low inflation in Poland, lowering the inflationary pressure in the form of a decrease in the average wage growth pace could weaken the zloty. Potential changes, however, will be rather limited - external factors still have the greatest impact on the zloty.

On Wednesday, one of the most important factors will take place. The Federal Reserve will publish a statement (after the Monetary Committee meeting) and a subsequent press conference with its President, Jerome Powell will be held. New macroeconomic projections will also be published. Interest rates are likely to be raised by 0.25 percentage points, which is widely expected. Market participants are wondering how many times the Fed will raise interest rates next year - only once or maybe more. Hawkish tone and better than previous projections could increase the probability of two (or more) increases in 2019, which would most likely strengthen the dollar. Given the weak data from the eurozone, the dollar appreciation in such a situation could harm the zloty, which, together with the currencies of emerging countries, would be under supply pressure.