Daily analysis 25.10.2013

The EUR/USD has been close to its recent highs despite weak data from Europe. Interesting PMI from the US. Rumors on possible verbal intervention regarding the euro strength, but the ECB board member, Asmussen not concerned with the common currency value. German Ifo reading. The zloty is still in a narrow range.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

• Already published German Ifo index.
• 14.30 CET: Durable goods orders for the US (survey: 1.7% m/m, the core reading 0.6% m/m).
• 15.55 CET: final University of Michigan index reading (survey 75.2 points).

Above 1.38. PMI from the US. Asmussen. Ifo

The EUR/USD passed the strength test yesterday. It didn't drop much after weaker-than-expected data from Europe, and then return to the levels before the US managers' index hit the wires. On Thursday I pointed out that the US PMI is usually a low level report (the market is more concerned with the ISM). This time, however, the situation could have been different due to the government shutdown. Additionally the reading was much below the estimates (51.1 vs 52.8 expected) and it dropped to the lowest level in 12 months. Moreover the output subindex contracted first time since September 2009. Commenting the data, Chris Williamson, chief Markit economist said that companies were “hit hard” by the government shutdown, but “it is too early to estimate the extend of the slowdown”. Williamson also gave some remarks on Fed's possible tapering decision saying that “The Fed will be equally unsure of the underlying health of the economy, and will no doubt want to see the economic data stabilise, which could take until the end of the year, before making any firm policy decisions.”. In result of the disappointing US PMI data the market will be closely watching the next week ISM.

Investors are speculating that the recent EUR/USD gains can limit the gradual European recovery. There are rumors that some ECB official or politicians can give “a kind of” verbal intervention to limit the euro gains. So far, it is not the case. Today a ECB board member Joerg Asmussen told the Italian newspaper Il Sole 24 (English info in The Wall Street Journal online) that “In nominal terms and in real effective terms, which is more important, it is within the band we have seen for the last ten years. I don't have any specific worry on the exchange rate," However, it is worth to follow the issue closely, because the stronger euro can weigh on inflation and give more arguments to cut the interest rates (which would be bearish for the euro).

The Ifo index has just hit the wires. It is lower than expected and below the previous month reading (107.4 ; estimates were at 108.2; in September 107.7). The reaction on the EUR/USD seems to be fairly muted which can be the result of yesterday market behavior when after weak PMI the common currency reminded strong.

Summarizing the EUR/USD seems to be ignoring the bad news, but rallying on positive data what confirms the overall bullishness of the most traded currency pair. The probability to test 1.40 level is rising.

No major changes on the zloty. Glapinski, MPC member on future monetary policy

Zloty is still moving in the narrow range, but we are observing a slight weakness at the beginning of the European session. There are, however, no sings on the horizon which can put a further pressure on the Polish currency and the 4.20 level will be rather not reached.

We had quite an interesting opinion from Polish MPC member professor Adam Glapiński (hawk). He told reporters yesterday (PAP and Obserwatorfinansowy.pl) that the interest rates will remain at the current level till the end of 1H 2014 and it is possible they will not be changed till the end of 2014. Glapiński also claims that he was slow regarding lower the rates and will be also cautious on rising them. Taking into the account his hawkish stance it can extend the market perspective on neutral monetary policy further into 2014.

Summarizing the zloty can be slightly weaker partly due to Glapinski remarks. However, I don't expect that we will be testing 4.20 level.

Expected levels of PLN according to the EUR/USD rate:

Expected GBP/PLN levels according to the GBP/PLN rate: