German economy under pressure (Afternoon analysis 6.02.2019)

The euro weakens after further data from Europe's largest economy. Interest rates in Poland remain unchanged, but the zloty is slightly weaker.

EUR/USD below 1.14

The euro quotations are currently under supply pressure from weak data from Europe. Today's data on the decline in industrial orders in Germany does not improve sentiment to the single currency before tomorrow's publication of production data. The EUR/USD quotations were below 1.14 an hour after the start of the New York trading session, falling to the lowest level since January 25th.

Once again, the data from the US was in contrast to the one from the eurozone. The US foreign trade deficit fell in November from 55.7 billion to 49.3 billion USD, while the market consensus assumed a negative balance of 54 billion USD. The data, due to the outdated period, will have a very limited impact on the dollar, but once again it illustrates the imbalance between the USA and Europe, which may support the US currency.

As expected, the Monetary Policy Council has maintained interest rates in Poland at an unchanged level (main reference rate of 1.5%). The impact of the MPC statement and the press conference was also limited. The Council has been keeping a dovish attitude towards a monetary policy for a long time, and now the slowdown in the largest economies in Europe will support the lack of increases this year and perhaps the whole of 2020. The zloty was slightly weaker today, but this was not the result of events related to the MPC, but rather a slightly stronger dollar and further weaker than expected data from Germany. Tomorrow's data on industrial production may be important, as it may potentially increase this supply pressure even slightly. In the following hours, however, we should observe stabilisation around current levels.

Tomorrow's preview

Just the beginning of Thursday may bring increased volatility in the currency market. Jerome Powell, Chairman of the Federal Reserve, will hold a speech in Washington at 1:00 p.m. (CET). Powell's words are usually meticulously analysed, and although it is a meeting with teachers, his comments on monetary policy may increase the fluctuation level of the US currency in particular. The chances for Powell to tighten his dovish position are very small, so the final impact on the dollar is likely to be limited.

At 8:00 a.m. Destatis will publish data on industrial production for Germany in December. It recorded a strong decline in November and today's order data for this sector in December also decreased more than expected. The market consensus points to a 3.4% year-on-year decline in production (and a 0.8% month-on-month increase). The consecutive month of its greater than expected decline may increase slightly the fear of accelerating the economic slowdown in Germany. This may increase supply pressure on the euro, but also weaken the zloty basket, given that Germany is Poland's main trading partner.

At 1:00 p.m., the Monetary Committee of the Bank of England will publish a statement on monetary policy, as well as a record of the discussions at the meeting (minutes). It is almost certain that neither interest rates nor the bond purchase program will change. However, the pound's volatility may increase significantly if committee members devote more attention to the Brexit process. Given the lack of clear conclusions on this issue, it is more likely that persistent uncertainty may slightly increase committee members' concerns about the impact of the Brexit on the economy.