Eurozone failed expectations (Daily analysis 05.09.2018)

Concerns about emerging markets persist and EM's depreciation is worsening. The EUR/USD stopped the downward trend, but the strong ISM reading from US industry and weak data from the eurozone increase the risk that the downturn will return. The zloty depreciates and the EUR/PLN reaches the 4.32-4.33 level.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• A lack of macro data may noticeably impact the analyzed currency pairs.

Low retail sales in the eurozone

The market keeps a close eye on events in emerging countries. Yesterday's reports of South Africa's entry into recession do not improve the economic climate in EM. The Turkish lira, the Argentine peso, the South African rand and the Brazilian real are consequently depreciating. New historical weakness records were again reached on the Indian rupee. In the morning, the USD/INR tested around 72.

In this context, the dollar performs best, especially since data from the USA remain very good. The ISM index of the US industry rose in August to 61.3 points. Only 0.1 points were missing to reach an unseen level in 34 years. Very strong increases were recorded in key sub-indexes. New orders rose to 65.1 points and production to 63.3 points. Solid increases to 58.5 points were recorded by employment. ISM data raise the chances that at the September Federal Reserve meeting not only interest rates will be raised, but the prospect of four more rate hikes (apart from the September one) will be maintained until the end of 2019. This would send a positive signal to the US dollar.

Eurozone data failed to meet expectations- retail sales in the single currency fell by 0.2% month-on-month and increased by only 1.1% year-on-year. In both cases, the readings were worse than forecasts and were the weakest since the year before. Retail sales in the US are growing more or less three times faster than in the eurozone, showing how big is the difference between the economic situation in the common currency and in the USA.

The divergence of Europe's and US economies (USA - rapid growth; eurozone - slow) supports the prospect of a stronger dollar. Firstly, this is due to the expected increase in interest rate differentials. Secondly, rapid growth in the US attracts capital to the US or causes US investment abroad to be halted. The third issue that should help the dollar is the persistent tension between Beijing and Washington. Therefore, if the trade conflict escalates, the current processes are likely to get worse. Developing countries will lose out and the USA will look relatively good against this background. Hence, it seems that US dollar increases are likely to continue.

The divergence of the economies on both sides of the ocean (USA - rapid growth; eurozone - slow) supports the prospect of a stronger dollar. Firstly, this is due to the expected increase in interest rate variations. Secondly, rapid growth in the US attracts capital to the US or causes foreign investment in the US to be halted. The third issue that should help the dollar is the persistent tension between Beijing and Washington. Therefore, if the trade conflict escalates, the current processes are likely to get worse. Emerging countries will depreciate and the USA will look relatively good against this background. It seems that dollar increases will probably continue.

Weaker dollar

Today, the Polish currency is falling below in red. This time not only to the euro, dollar or franc but also to a small extent to the forint. Around midday, the EUR/PLN pair is quoted in the 4.32-4.33 range. Pressure from emerging market currencies is the main reason for the zloty's depreciation.

Taking into account Poland, it is worth noting that in retail sales are growing the fastest from the entire EU (as much as 7.7% year-on-year). However, this is not good news, as households do not save, but consume the whole of the increase in salaries or the effects of a small increase in employment. Therefore, a good economic situation is not used to build a financial cushion, which, with the coming clear slowdown in GDP growth, is a negative information. In the context of the zloty, it is particularly worth listening to the press conference after the MPC meeting. Compared to the conditions two months ago (the Council did not meet in August due to the holiday period), the situation in emerging markets has clearly deteriorated. It will be interesting to learn from these events and to hear whether the external environment encourages the MPC to adopt a more dovish or hawkish approach. This may be a crucial piece of information, taking into account signals from within the country in the near future.