Calm trading before the US election (Afternoon analysis 6.11.2018)

Limited fluctuations in the currency market. The second reading of the eurozone's PMI is better than expected, but the Italian services sector is in recession. The zloty may weaken tomorrow.

EUR/USD above 1.14

Tuesday was relatively calm on the currency market. Today's published order data from the German industry and subsequent readings of PMI indexes of Germany and the eurozone turned out to be better than expected. The market was warned by PMI data from the service sector in Italy. This index fell below the 50 point mark (49.2 points to be precise), which separates the increase from the decline in the sector. This decline illustrates the scale of the problem facing the eurozone in the near future.

The main currency pair, i.e. euro/dollar (EUR/USD), rose slightly above the 1.14 level today. These are still slight changes, and small fluctuations are mainly caused by the anticipation of the outcome of the US elections. The most likely result (looking at the latest FiveThirtyEight polls) is that the Republican party in the Senate and the Democratic party in the House of Representatives maintain power.

Such a result should trigger a limited response in the currency market. In a more general perspective, the dollar should continue its upward trend. The scenario of an unexpected takeover of power by the Democrats in the Senate (the chances for this now amount to 19% according to a joint survey) would weaken the dollar, potentially reducing the fiscal stimulus policy.

Small changes were also observed in the case of the zloty's quotations. The Polish currency in relation to the main currencies oscillated close to yesterday's closing levels. The chances of significant changes in today's quotations seem to be limited. Slightly greater fluctuations may occur tomorrow when the Monetary Policy Council statement on monetary policy will be published, and a press conference will be held.

Tomorrow's preview

At 8:00 a.m., the Federal Statistics Office (Destatis) will present data on industrial production in September. The market consensus assumes an increase of 0.1% per month. The chance for a slightly better result increased after today's better than expected data on orders in the German industrial sector, which increased by 0.3% in September, compared to an estimated decline of 0.4%. An upward trend of 0.5% points to 2.5% m/m in August was also observed. Although the correlation between orders and production is not ideal from month to month, the confirmation of a positive trend in September with a higher than expected production growth pace may support the euro.

At 11:00 a.m., there will be a slightly more important publication for the single currency. Eurostat will publish data on retail sales in the eurozone. The market consensus points to a slowdown in growth from 1.8% in August to 0.7% in September (on an annual basis). Last year's high base will mainly drive this decrease. In September 2017, sales increased by 4.0% year on year. Consumption is responsible for the majority of GDP, and the rate of economic growth pace in the eurozone in Q3 clearly disappointed market expectations (1.7% per year), therefore, the data on September retail sales has limited potential for positive surprises. A slowdown in growth below consensus, especially below 0.5%, could weaken the euro.

At 4:00 p.m., MPC will publish a statement after the two-day meeting. At the same time, a conference with Andrzej Glapinski, the President of the Monetary Policy Council, will also begin. The latest worse than expected data from the Polish economy and lower GDP growth pace in the eurozone or a strong drop in oil prices make it impossible for the Council to tighten the message. Taking into account internal and external factors, the message from the MPC in the context of future interest rates may be even milder than during previous statements and conferences. In such a scenario, the zloty may be under pressure, although external factors will still have the greatest impact on it (e.g. the behaviour of the dollar and the euro).