Afternoon analysis 23.01.2018

Current evaluation of the German economic situation has been the highest since December 1991, according to the latest results of the ZEW survey. Positive macro data from the eurozone helped the EUR/USD pair to return above 1.227, despite the end of the "government shutdown" in the US. A stable zloty, but the situation in the following hours may depend on market sentiment in the US.

Positive data from Europe

Today, the ZEW Institute published January's results of the financial market survey, the economic sentiment was above expectations both for Germany (20.4 pts vs. 17.8 pts) and the eurozone (31.8 pts. 29.7 pts). This is the highest level of this index for the single currency area since July 2017 and for the German economy since May.

In the case of Germany, special attention should be put on the current conditions index, which increased to 95.2 points (out of 100). Prof. Achim Wambach, the President of ZEW, estimates that "private consumption, which was the most important driver of economic growth in 2017, is likely to continue to stimulate growth in the coming six months".

The ZEW publication confirms the improving condition of the eurozone economies (yesterday, the IMF revised upward the forecast of the global GDP growth rate in 2018, also for the eurozone by 0.3 percentage points). Today's data helped the main currency pair to appreciate and move from 1.222 to 1.227. As a result, the EUR/USD exchange rate was close to yesterday's closing level around 3.00 p.m..

Moreover, the range of volatility was also limited - comparable to that observed yesterday. The calendar of scheduled events for the following hours is almost empty, therefore, the risk of significant changes in the currency market is rather small. As a core scenario remained the stabilisation of the market until Thursday's statement and press conference of the European Central Bank (ECB).

Stable zloty

Slight changes on the main currency pair have resulted in the limited volatility of the zloty. Around 3.00 p.m., the zloty was close to yesterday's levels in relation to the main currencies. A slight increase in the EUR/USD exchange rate around 1.226 helped the zloty to appreciate in relation to the dollar - the USD/PLN exchange rate fell from 3.41 (observed during midday) to 3.40 at 3.30 p.m.. Moreover, the zloty in relation to the euro, the pound or the franc remained close to yesterday's levels.

Although a consolidation close to current levels until Thursday is considered the base scenario, maintaining the main market indexes in the USA may be important for the zloty in the following hours. Yesterday, they reached historic highs again. However, if today a deterioration in sentiment and the recovery of recent growth is observed, the zloty may depreciate by about 0.01-0.02 PLN.

Tomorrow's preview

In the morning, IHS Markit will publish January's preliminary data on the PMI indexes of the industrial and service sectors for France (9.00 a.m.), Germany (9.30 a.m.) and the eurozone (10.00 a.m.). In the last few months, the indexes surprised positively, especially in the case of industrial activity. The median of market expectations indicates a relatively small depreciation of the indexes (by no more than 0.3 pts).

Although, another month of increased levels of these indexes could slightly strengthen the euro, the potential market reaction to the data seems to be limited. Moreover, market attention can be focused on Thursday's ECB, which may have a more significant impact on the euro.

At 10:30 a.m., the Office for National Statistics (ONS) will publish data from the British labour market. The unemployment rate will probably remain unchanged at 4.3% (the lowest for 43 years). However, the market will be eager to find out the data on average wage growth in November. It has still been below inflation (2.5% vs. 3%), which means that, in real terms, the average wage decreased.

The market consensus assumes an increase in the average wage by 2.5% per year (similar to a month ago). An increase above this level could suggest higher wage pressures on inflation and, as a result, a greater probability of monetary tightening earlier than expected. Brexit negotiations are likely to still have the biggest impact on the pound trading, but a reading of more than 2.6% per year could further support the pound's recent appreciation.

At 3:45 p.m. IHS Markit will publish preliminary PMI data for industry and services in the US. In both cases, readings close to December's results are expected (industry: 55.0 vs. 55.1 points, services: 54.0 vs. 53.7 points). Moreover, when taking into account the US market, the PMI activity indexes published by ISM are relatively more important. Market participants are likely to focus on ECB on Thursday. However, if IHS Markit data clearly and unambiguously deviate from market expectations (approx. 1 pts. and above), dollar appreciation or weakening can be observed on a limited scale.