Euro under pressure (Afternoon analysis 4.03.2019)

The beginning of the week was not favourable for the single currency. The euro exchange rate fell to around 1.1320 USD, the lowest level since February 22nd. The market can discount the potential cut in forecasts by the ECB on Thursday and the more dovish message. The zloty remains stable, which can be perceived positively in the current situation.

EUR/USD between 1.13 and 1.14

Although there were no significant macroeconomic events planned for today, the euro has been subject to strong supply pressures since the beginning of the European market quotations. The changes were not significant, but the drop in the EUR/USD from about 1.1380 to 1.1330 occurred quite quickly, and the quotations remained around these levels for the rest of the day, until the beginning of the New York trading session. Interestingly, at the beginning of the quotations still in the night hours, the euro appreciated slightly after Sunday media reports.

During his speech, US President Donald Trump called the head of the Federal Reserve "a man who likes interest rates". Only a few months ago, the dollar fluctuated considerably, but the market seems to have already become immune. In theory, positive reports of a trade agreement between China and the USA should be more supportive information for the euro than for the dollar. The result, however, was the supply pressure, which could be caused by placing the spotlight on important events in the second part of the week related to a statement and press conference of the European Central Bank (ECB) and macroeconomic data from the US labour market on Friday.

The beginning of the US trading session brought increases in the main market indexes due to the possible removal of customs barriers. It also brought a further strengthening of the dollar - the EUR/USD quotations fell to around 1.1320, i.e. to their lowest level since February 22nd. However, they will probably not go significantly beyond the range of 1.13-1.14, at least until Thursday.

Apart from a slight increase in the USD/PLN exchange rate to approx. 3.80, the somewhat stronger dollar and weaker euro did not have a particularly negative impact on the Polish currency, although such an arrangement often resulted in an increase in supply pressure. However, the zloty maintains most of the increases from the end of February - the EUR/PLN is still quoted around the 4.30 boundary. The further fate of the zloty in the following weeks will depend on the incoming data. Significant cuts in the ECB's forecasts on Thursday, combined with a 3.5% annual increase in the average wage level in the USA, may ultimately weaken the zloty basket somewhat. Potential decreases in the zloty should not be significant in such a scenario.

Tomorrow's preview

At 10:00 a.m. IHS Markit will publish the final PMI data for the eurozone. They are unlikely to deviate from the preliminary readings, so the market's attention may focus on the January retail data which Eurostat will present one hour later. Recent inflows of data from the eurozone are not encouraging. This is likely to encourage the European Central Bank (ECB) to revise macroeconomic forecasts for GDP and inflation as early as Thursday, and perhaps even to accommodate the message of monetary tightening. Although retail data will not be crucial, they may show whether the negative trend from the end of last year has also moved to 2019.

Currently, the market may be more sensitive to such signals from the eurozone, which would fit well into the narration of a slower than expected economic slowdown and the need to postpone the rate hikes for next year. The median of market expectations indicates an annual increase in retail sales of 2.1% (1.3% month-on-month) - a clearly worse than expected reading may weaken the single currency, which is likely to remain under supply pressure while awaiting the ECB-related events on Thursday.

At 4:00 p.m., ISM will publish the US service sector PMI for January. Data from the corresponding index for industry have disappointed market expectations but would not result in a pronounced depreciation of the dollar. The US currency has been slowly appreciating since Thursday. The market consensus suggests an increase in PMI by 0.5 points to 57.3 points, although, as in the case of data from the industrial sector, no significant response is likely to be expected. This week market participants will focus primarily on the events scheduled for Thursday (ECB) and Friday (US labour market report). Therefore, the dollar should move within a limited range of fluctuations until then.