Strong fluctuation at the end of the week (Afternoon analysis 15.02.2019)

Thrilling end of the week on the currency market. The EUR/USD pair recorded new three-month lows after positive reports from China on trade negotiations and statements by ECB member. However, industrial production in the USA fails to meet expectations, and the dollar loses all the profit generated during the day. Relatively large fluctuations are observed on the zloty, but ultimately the changes are small in relation to those seen yesterday.

ECB even more dovish

As the positive news of the day was a preliminary trade agreement between the US and Chinese negotiators. Both countries are expected to work on the final version by March 1st. This has definitely improved sentiment, especially in the equity market. Although this is only in theory positive news for the euro, it has gradually started to depreciate and the EUR/USD pair moved away from the 1.13 boundary.

In the afternoon, Benoit Coeure, a member of the European Central Bank, gave a speech in New York. He said that the slowdown is clearly stronger and more widespread than bankers expected and that the path followed by inflation will be shallower. Coeure also added that he "is not a fan" of interest rate hikes, only to cut them later. Another important piece of information provided by Coeure was that the ECB had already discussed the new TLTRO (targeted long-term refinancing operations) and LTRO.

After these comments, the euro depreciation accelerated. The EUR/USD exchange rate reached a new three-month lows, falling to around 1.1250, while in the morning quotations were still moving just below the 1.1300. Today Benoit Coeure's speech highlighted how far the ECB is from any monetary tightening at the moment. If the slowdown continues at a faster than expected pace in the first months of 2019, there may be a real discussion about further easing the already ultra-accommodative monetary policy.

New lows on the EUR/USD pair had a negative impact on the zloty basket. In the morning, the zloty appreciated slightly, however, with the drop in the main currency pair's exchange rate, the retail pressure on the zloty only increased. Apparently, the macroeconomic data from the USA which was significantly worse than expected for another day in a row was a "rescue" for the zloty. Industrial production in January fell by 0.6% on a monthly basis, recording the largest fall since August 2017. The greatest impact on the decline was caused by lower activity in manufacturing, where production dropped by 0.9%. The likelihood that the reading of GDP for Q1 in the USA will be lower than expected clearly increased (after today's data and yesterday's data on retail sales). The EUR/USD pair returned to about 1.1280 before the beginning of the New York trading session.

As a result, the zloty pared part of the losses incurred against the main currencies, the EUR/PLN pair fell slightly below 4.33 and the USD/PLN pair below 3.84. Today's significant fluctuations show the high level of uncertainty on the market, which is crucial when it comes to the zloty's quotations. Next week will be important for the Polish currency both in terms of economic data from the eurozone and Poland.

Next week's preview

The beginning of next week will be crucial for the zloty. On Tuesday, the Polish Central Statistical Office (GUS) will publish data on changes in average wages and employment in the corporate sector. On Wednesday data on industrial production will be released, and on Thursday data on retail sales in January. If the data turns out to be well below market expectations, the fear of a stronger than expected slowdown in Poland may be confirmed. Taking into account the gradual weakening of the zloty in the last two weeks, it could even cause greater depreciation.

This may happen if the preliminary PMI indexes of the eurozone economy (which we will be published on Thursday) are also weaker than expected. The industrial index is very close to the 50 point mark, separating growth from decline in the sector. A drop below this level (which has already occurred in Germany, France and Poland, among others) in the case of an index for the entire eurozone could increase supply pressure on both the euro and the zloty.