Dollar is getting stronger, stable zloty (Afternoon analysis 8.11.2019)

Despite better than the expected data on foreign trade from China and Germany, the euro is depreciating. On the other hand, the US currency appreciates: the EUR/USD pair is getting closer to 1.1000 boundary. Despite the stronger dollar, the zloty remains stable: the EUR/PLN remains at around 4.26. The next week, which is rich in macro data, may increase fluctuations in the foreign exchange market.

Zloty with no significant changes. For now…

Today's published trade data from the Chinese and German economies, which exceeded the market expectations, may support good market sentiment. Both exports and imports decreased in China in October much less than expected: exports by 0.9% year-on-year and imports by 6.4% year-on-year. In Germany, on the other hand, September was marked by stronger than expected growths: exports by 1.5% on a monthly basis only and imports by 1.3% (4.6% and 2.3% per year respectively). As a result, the trade surplus also exceeded expectations by 1.6 billion EUR and amounted to 21.1 billion EUR.

However, the data had a limited impact on the euro. The dollar continued to appreciate today and increases are now motivated by the higher likelihood of monetary tightening in the US, due to a potentially more comprehensive than expected first phase of the trade agreement with China. The EUR/USD exchange rates have deepened the decline observed in recent days to around 1.1026 in the afternoon. If no new trade front information becomes available, trade in the main currency pairs should be stable. In the afternoon, the University of Michigan's preliminary data on consumer sentiment in the US will be published, but its publication is likely to have a limited impact on the market if it does not differ significantly from the consensus (95.9 points).

The zloty's stabilisation is supported primarily by continued positive sentiment on the broader market. In relation to the main currencies, the zloty is traded close to yesterday's closing levels - the EUR/PLN pair to approx. 4.26, and USD/PLN approx. 3.86. A potential threat to the zloty is the dollar, which is gradually appreciating. If the sentiment on the market deteriorated, due to, e.g. negative information on trade negotiations between the USA and China or more confrontational attitude of the US President, the zloty could be under supply pressure. In such a scenario, the USD/PLN could quickly move to approx. 3.90, and the EUR/PLN to above 4.28. However, the base scenario remains the stabilisation of zloty exchange rates around current levels until the end of the day. This scenario may change slightly next week when the market will receive a large dose of macroeconomic data from both Europe and the USA.

Next week's preview

Next week will be interesting. Will the market manage to maintain positive sentiment and high levels of the leading stock indexes (historical highs in the USA, in Europe, they are very close)? Central banks are responsible for a significant part of this growth as they have accommodated their policies and rhetoric in response to trade tensions between the US and China. It is known that it is changing and both powers are striving for a broad agreement and a gradual withdrawal of mutually imposed duties. This makes it likely that the Federal Reserve, after three rate cuts at three meetings in a row, will not do so any more, and perhaps even begin a discussion about returning to the growth path of rates. If such market belief prevails on the market, we can observe a deterioration in sentiment, which could strengthen the dollar and weaken the zloty.

Next week's publication of macroeconomic data may help to change market sentiment. On Monday, the UK economy will provide a set of data, including GDP growth in Q3, industrial production and international trade balance. Yesterday's rhetoric from the Bank of England (two members voting for a reduction in interest rates, a dovish statement, a cautious outlook for the economy made by Mark Carney, the bank's head) somewhat surprised investors and weakened the pound, which strongly appreciated over a month. Monday's publications from the UK could, therefore, increase the pound's volatility range. If they turned out to be below the market expectations, they could confirm Mark Carney's concerns from Thursday's conference and the supply pressure on the pound could increase.

On Tuesday, the ZEW Institute will publish the economic sentiment index for Germany and the eurozone as a whole. On the following day, Eurostat will publish data on industrial production in the eurozone in September. If these data do not fail, the positive market sentiment can be maintained. However, much depends also on consumer inflation (CPI) published on Wednesday in the USA in October. The median of market expectations indicates that the CPI core index will be maintained at 2.4% year-on-year. Still, its increase above the level would raise the likelihood of the expected monetary tightening. This would most likely strengthen the dollar, worsen sentiment and weaken the zloty's basket. Market participants will also listen carefully to Jerome Powell, the head of the Federal Reserve, addressing the Congress and it may cause significant volatility of the dollar.

The back of the week may be equally important for market sentiment. On Thursday, the preliminary data on the growth pace of the German economy in Q3 will be published. Most likely, the GDP (seasonally adjusted) shrank by 0.1% quarter-on-quarter, similarly to the previous quarter. However, divergences from this level in either direction may result in large movements on a broader market. On Friday, further interesting data will be published, including data on the US economy, i.e. retail sales in October. A month ago, they triggered slight concerns about US consumer spending (a decrease in the core sales index by 0.1% month-on-month). The market now has many factors to consider, but a broader trade agreement combined with a more hawkish tone of the Federal Reserve and solid readings from the US economy may contribute to a gradual appreciation of the dollar and a decline in the EUR/USD exchange rate in the 1.10 direction and below.