Market sentiment improves (Afternoon analysis 26.11.2018)

The new week starts with a better sentiment, and the euro appreciates. The Polish currency is in a limited fluctuation range. The zloty's rapid weakening seems to be less probable scenario.

The EUR/USD slightly increased but changes are limited

Sentiment on the broader market improved today. Even during the Asian session, the main indexes were clearly appreciating. Their European counterparts behaved in a similar way later, and contracts for the US indexes gained more than 1%. Moreover, after a considerable depreciation and a drop in the 50 USD per barrel (WTI), oil increased about 2%. A lower level of risk aversion weakened one of the "safe haven", i.e. the yen. The Japanese currency lost about 0.6% in relation to the main currencies.

Good news came from the European market. Italy relaxed its position in the conflict with the European Commission regarding the budget deficit. This should translate into a slightly better euro valuation, as one of the risks for the eurozone (apart from weak economic growth, among other things) is decreasing. As a result, the yields of Italian government bonds fell sharply. Even on Friday, the interest rate of bonds maturing in two years amounted to 1%, while today it dropped even to 0.64% in the morning (although in later hours it gradually increased to about 0.8% at 3:00 p.m.).

At 3:00 p.m., Mario Draghi's speech to the European Parliament's Committee on Economic and Monetary Affairs was also published. Although Draghi drew attention to the economic slowdown, he admitted that it might be partly temporary. The most important issue regarding the euro in terms of inflation and interest rates remained unchanged compared to what he said earlier. Inflation remains subdued, but there are strong arguments that it will increase over time.

The speech made by the head of the ECB is probably neutral for the euro. The EUR/USD quotations increased to around 1.1380 today, about 0.3% above Friday's closing level. Just before the opening of the New York market, the quotations oscillated around 1.1350. The lack of important publications scheduled for the afternoon should help stabilise the currency market.

The potential absence of significant market changes is also good information for the Polish currency. Today, the zloty was stable in relation to basic currencies. The EUR/PLN quotations were still slightly below the 4.30, and the USD/PLN quotations oscillated around 3.78. The zloty is currently supported by good macroeconomic data from the Polish economy. The data suggests that the Polish economy may develop at a faster pace in the Q4 than expected. This, in turn, may be treated as the support for the zloty in the case of a worsening market sentiment and/or the appreciation of the dollar.

Tomorrow's preview

Calendar for scheduled publications for Tuesday is practically empty. In turn, the currency market may be affected by the speeches of the Fed representatives planned for tomorrow. The market's attention may be focused on the speech of Richard Clarida, vice-chairman of the Federal Reserve. It was his last interview for CNBC that weakened the dollar against the main currencies.

The dollar pared some of the losses, but around Clarida's speech (start at 2:30 p.m.) the level of fluctuations can be expected to increase. However, if his statements once again have a significant impact on the main currency pairs, the potential weakening of the dollar may affect the entire market, strengthening, among others, the zloty.

Speeches will follow the next part of the day by other Fed members, i.e. Charles Evans (4:30 p.m.) and Esther George (8:30 p.m.). The impact on the currencies of these two events may be much smaller. After Clarida's speech, the market may already focus on Wednesday's speech by Jerome Powell, head of the Fed.