Euro and zloty may be weaker yet (afternoon analysis 24.01.2019)

Weak data from the euro area and the ECB changes the risk balance downwards. This is not good news for the euro, but also for the zloty. Both currencies may gradually weaken, although changes in EUR/PLN may be limited.

For contrast: data from the US

There were basically two very important events today. Publication of PMI indicators for the euro area and press conference of Mario Draghi, chief of the European Central Bank (ECB). After very weak PMI readings, the euro was under bigger pressure. The euro to the dollar exchange rate fell to around 1.1330 after the PMI. With the start of Draghi's press conference at 2:30 p.m. (CET), the U.S. Department of Labour will publish weekly figures on initial jobless claims. Once again they surprised on the positive side - the number of applications for unemployment benefit fell to 199,000, compared to expectations of 19,000 higher. This is also the lowest level since mid-November 1969. Although these are rather secondary figures in terms of their impact on the dollar, they reinforce the argument about the growing disproportion between the US and the euro zone.

Perhaps the most important question for today was whether the ECB would shift the balance of risk for the economy downwards. Given the recently incoming weaker-than-expected macro data from the eurozone, Mario Draghi's statement that the ECB unanimously changed the risk balance was not a shock. However, the euro reacted with a fall of value - the EUR/USD exchange rate fell slightly below 1.1310. With much worse readings from the euro area economy and a slightly more pessimistic assessment by the ECB, it seems that a dip below 1.13 seems to be just a matter of time. The change in the risk balance assessment was mainly due to growing protectionism, high volatility of financial markets and issues in emerging economies. Draghi also quoted Brexit and its implications as one of the reasons.

Today's change in the assessment of risks to the economy also reduces to virtually zero the chances of interest rate increases this year. Core inflation (excluding the most volatile factors) remains subdued all the time. During the press conference, the ECB's Head of the ECB reiterated that the increase in wages would translate into a pick-up in inflation, which should increase in the medium term (i.e. around a year). During the press conference, EUR/USD exchange rate rose back to around 1.1380. In the short term, the impact of today's events should have a negative impact on the euro, albeit rather limited one due to, among other things, the partial government shutdown in the US which could have a drag on the Q1 GDP.

A series of weak data from the euro area and the ECB's change in the risk balance assessment is ultimately not good news for the zloty. In particular, recent macro data from the Polish economy came in also worse than expected. Although the slowdown in Poland is not as substantial as in other European economies, it may also exert downward pressure on the Polish economy. As a result, we can observe a gradual weakening of the zloty's basket, although due to the weak condition of the euro and the persistent difference in interest rates, EUR/PLN exchange rate may move within a relatively limited range. Today, changes in zloty's value relative to major currencies were small and no important events planned for the rest of the day suggests that the probability of significant changes in the Polish currency basket is limited. However, today's events tilted tio the negative side for the euro indicate that the chances of a weakening of the zloty have increased while the possibility of appreciation has decreased.

Tomorrow’s preview

At 8:00 a.m. (CET) Ifo institute will publish the sentiment index of German entrepreneurs. The ZEW index which measures the sentiment among economists for Germany, showed that expectations as to the future state of the economy were still at a low level, albeit, slightly better than expected. However, a significant drop was recorded in the index assessing the current situation. A similar assessment can also be expected among German companies, although in the context of tensions in international trade, Brexit and a faster economic slowdown, their future expectations may deteriorate significantly. The median of market expectations indicates the main ifo index to fell by 0.3 points to 100.7 points, while the current assessment index to fell by 0.5 points to 104.2 points. Worse data than consensus, following the recent bad streak of macroeconomic readings from the euro area, may increase supply pressure on the euro.

The Census Bureau will report at 2:30 p.m. the data on durable goods orders in the US in December. Market expectations point to a 1.7% monthly increase in orders and a 0.2% increase in their core index (excluding transport). US industrial production data for December were slightly better than expected, and if core durable goods orders are in line with or above market consensus, the pressure on the appreciation of the dollar against the euro may increase. Although monetary tightening in the US is likely to be slower than previously expected, the gap between the US economy and the euro area seems to be widening, which should support the dollar.