Euro again under pressure (Afternoon analysis 8.10.2018)

The yields on Italian bonds are increasing after the statement made by the Italian Deputy Prime Minister in the confrontation with Brussels. The zloty is relatively stable, although the dollar appreciation moves the USD/PLN pair to one and a half month highs.

No positive impulses for the euro

Monday was not full of macroeconomic data, but the published data was not favourable for the euro. Sentix's economic index fell to 11.4 points. Although the decline was not significant, by 0.6 points (and 0.3 points more than consensus), investor sentiment in the eurozone was at its lowest level in four months.

The reason for this decline is not a surprise. The populist Italian government is pushing for reforms that place a heavy burden on the state budget, which is having a negative impact on sentiment across Europe. As a member of the eurozone, Italy's potential financial crisis could translate into a slowdown in economic growth throughout the region.

Today, the Italian treasury bond market is again under pressure. This time Matteo Salvini, Deputy Prime Minister, did not help. The Italian politician cited by the news agency Bloomberg stated that the real enemy of Europe is Jean-Claude Juncker, Brussels' restrictive budgetary bureaucracy and open borders policy. He also added that those who intend to speculate on the Italian economy lose time because the government will not withdraw.

In reaction to the confrontational attitude, the sentiment on the broader market deteriorated. The main European indexes lost about 1% and the Italian index of the 40 largest companies about 2.5% at 3:00 p.m. The euro was also under pressure - the EUR/USD quotations fell again below the level of 1.15 (the lowest level since August 20th), which was observed last Wednesday and Thursday (about 1.146).

The dollar's appreciation resulting from this has also pushed the USD/PLN exchange rate to around 3,758, the highest level since August 20. This movement is not surprising, as well as small losses to the franc (capital escape to the safe Swiss haven), but the zloty behaved relatively stable, taking into account market events. The EUR/PLN pair oscillated around 4.31, practically unchanged from Friday's level - the Polish currency behaved similarly in relation to the pound or the forint.

The calendar of macroeconomic publications for the rest of the day is empty, therefore, the zloty's quotations will largely depend on the US market behaviour. Deterioration of sentiment and deepening of falls (futures contracts indicate an opening clearly below Friday's level) could also strengthen the dollar and bring the main currency pair's quotations towards the 1.14 limit. In such a scenario, the zloty would also be under supply pressure, and the USD/PLN would move towards 3.80.

Tomorrow's preview

At 8:00 a.m., the Federal Statistics Office (Destatis) will publish Germany's international trade data for August. After an unexpected significant fall in the trade surplus in July to 15.8 billion EUR (the lowest in more than four years), the median of market expectations points to a slight increase to 16.4 billion EUR. Although this is rather secondary in terms of its impact on the euro's quotations, another reading, clearly worse than expected, could weaken the euro, given the current pressure on the European currency due to the issue of Italy's budget and market fears that the country's problems may spread out to the rest of the eurozone.

Aside from the still unresolved Italian problem, which will hang over the market in the near future, tomorrow there will not be many important publications. In the context of the euro and the whole market, however, Thursday will be important. On this day, minutes from the last meeting of the European Central Bank and data on consumer inflation in the USA in September will be published. Both of these events usually result in significant market fluctuations, this time it may be similar, especially given the current market situation. If the events related to Italy do not trigger significant changes in the market until then, potentially significant changes in the euro and dollar valuation, as well as the zloty, can be expected at the end of the week.