Euro in the red, dollar goes up (Afternoon analysis 02.10.2018)

The US currency appreciates due to increased concerns about Italy's budget. The pressure on the euro leads the single currency towards 1.15. The zloty is relatively stable, although compared to the dollar it is the weakest in three weeks.

EUR/USD close to 1.15

On Tuesday there was a marked deterioration in sentiment caused by the situation with the Italian budget and its approval by the European Commission (the deficit assumed in it is higher than expectations and what the European Commission can accept). The comments made by Italian officials about coping better with the budget of their own currency did not help either. Later on, it appeared that there was no willingness to leave the eurozone, but the sentiment on the markets still remained negative.

Fears that Italy's problems will escalate to the eurozone have weakened the single currency today. For another day in a row, the euro clearly depreciated in relation to the dollar, which benefited from weaker sentiment. The EUR/USD quotations have fallen to 1.15, their lowest level since August 21st.

For the second time, fears about the situation in Italy have increased. After the first time, the market rebounded and returned to normal levels. It cannot be ruled out that a similar scenario will occur now. It is very unlikely that Italy will leave the eurozone at the moment, but the prolonged fiscal struggle between the Italian Government and the European Commission could burden the euro.

The dollar's appreciation trend is likely to increase in the long term, due to the rapid pace of monetary tightening, compared to the eurozone. This is another factor that may also hamper the euro's growth, if the sentiment remains weaker on the broader market.

The zloty was relatively stable in the context of the weaker euro and the stronger dollar. The EUR/PLN quotations moved between 4.29 and 4.30, which is not surprising, as the fluctuation range of this pair is relatively limited in recent months. It is greater in the case of the dollar-zloty pair and today the US currency has appreciated. USD/PLN rose above 3.73 today, reaching the highest level in three weeks. This should not come as a surprise, as the dollar ought to strengthen with time, its weakening should be treated as temporary.

Tomorrow's preview

In the morning, the PMI index for the eurozone's industrial and services sectors will be known. However, this will be the second reading of these indexes and there is no reason to expect them to deviate significantly from initial estimates, therefore, the impact on the euro will be rather limited. However, a more important aspect related to this context may be the data on retail sales in the eurozone for August, which Eurostat will publish at 11:00 a.m. The median of market expectations indicates an annual growth of 1.7% (0.6 percentage points more than in July). Given the recent rapid weakening of the euro, these data may have a clear impact on its quotations, if it deviates significantly from the consensus (above +/-0.2 percentage points).

At 2:15 p.m., ADP will provide data on changes in employment in the non-farm sector in the USA for September. Although the Friday report of the Department of Labor will be more important, the publication of ADP may give an indication of what to expect. Market expectations indicate an increase of 187,000 payrolls, although it should be remembered that the correlation between ADP and official data is not always good. On the other hand, Friday's wage data are much more important.

At 4:00 p.m., ISM will publish PMI for the services sector. The analogous index for the industrial sector published on Monday failed expectations, especially when it came to the price sub-index (which may suggest lower inflationary pressures). The market consensus points to a decline of 0.4 pts. to 58.1 pts. in September. A weaker result could suggest a slight slowdown in the growth pace of the US economy, which in theory could weaken the dollar. Theoretically because the dollar is clearly appreciating at the moment, mainly due to problems in the eurozone (Italy's budget issue). If negative sentiment on the market does not change, even worse than expected ISM data may not be able to weaken the dollar.

Tomorrow at 4:00 p.m. the press conference of the Monetary Policy Council will also begin after a two-day meeting. Interest rates will not be changed, but it may be interesting to see the stance of council members on market events not related to current affairs. Inflation in Poland has not positively surprised recently, so from this side, hawkish signals should not be expected. Oil prices were an issue often raised by Adam Glapinski, Chairman of the MPC. Currently, their high level has not turned out to be temporary and prices are still gradually increasing. The impact on the Polish economy and the pace of its development may be negative, as the trade balance will deteriorate. This, in turn, may slightly change the view of some members regarding the current monetary policy. Ultimately, however, external factors should continue to play a key role in the zloty's valuation and the impact of the Monetary Policy Council conference should be limited.