Important ECB meeting (Daily analysis 25.10.2018)

Significant changes in the markets continue to have a limited impact on the currency market. Today, the ECB may receive many questions about further monetary policy measures. The pressure on the zloty has slightly increased, it is still relatively limited. The euro is quoted in the range of 4.31-4.32 PLN.

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

• 1:45 p.m.: ECB interest rate decision and short statement following the central bank meeting (estimates: unchanged at 0.0 for the refinancing rate and minus 0.4% for the deposit rate).
• 2:30 p.m.: Begining of the press conferece following ECB meeting- Mario Draghi's full statement and question and answer time.

ECB in the limelight

A few weeks ago, it seemed that at least until the end of the year, the ECB meetings would not be significant. The path of QE tapering was clear (end of December 2018), and interest rates will not be raised until summer 2019. Recent surprisingly weak macroeconomic data from the eurozone, Italy's irresponsible policy and the return of core inflation below the 1.0% y/y limit hamper this baseline scenario.

That is why Mario Draghi will face a difficult choice today. Should he address in any way the fact that GDP may grow much slower than expected (e.g. only 0.3% in Q3 according to IHS Markit's estimation), or should he say that this is still a temporary element and that the situation will improve in the following months?

It is certain that during today's press conference questions will rise about inflation. The return of its core part (excluding fuels and food) below 1.0% y/y in the last two months questions the rate of inflation reaching the 2% target, so it also becomes an argument, e.g. extending QE or postponing the date of interest rate rises.

Apart from inflation and growth rates, there is also a conflict between Italy and the European Commission. Rome's economic policy is very irresponsible, and the influence of the European institutions on such a large country is much smaller than in the case of Greece. Of course, the ECB may ignore this and say that nothing is happening, but if the Italian crisis begins to expand, the link through the single currency between Italy and the other eurozone's countries will have to be considered in the activities of the central bank (e.g. by not tightening monetary policy).

Finally, it is also worth noting another technical detail, which may be important for Italian bonds and the euro valuation. Although new purchases of eurozone government bonds expire at the end of the year, those that mature will not reduce the balance sheet of the central bank, as the ECB will keep it stable at around 2.5 trillion EUR.

Not necessarily the value of purchases of individual countries' bonds will be the same as the value of those that mature. The conversion rate by which bonds are purchased may change from the new year on. Over the last few years, Italy's weak condition and the relatively good condition of Germany, for example, have led to a decline in Italy's share of the eurozone economy. Therefore, the ECB may buy less Italian bonds (formally decided by the end of the year) than the value of the maturing treasury instruments. Anyway, Rome already believes that this decision will be directed against the government of Prime Minister Giuseppe Conte. If the ECB suggests these changes today, the yields of Italy's debt could rise again.

Therefore, today's conference after the ECB meeting may be important. Mario Draghi's answers to key questions will determine the condition of the euro. Given recent events, it seems more likely to be more negative than a positive impression for the euro from the monetary authorities of the single currency area.

Zloty under slight pressure

Strong sell-off on the US markets and relatively low EUR/USD quotations, as well as the threat of worse than expected economic growth in the European Union, depreciated the zloty slightly. Before midday, the EUR/PLN fluctuated between 4.31- 4.32, and the franc was around 3.80 PLN.

Greater depreciation of the zloty and other regional currencies was held back by the fact that along with the drops on the markets, the yields of the US Treasury bonds also decreased.

However, if the Federal Reserve is not afraid of sales on the US markets (base scenario), and data from the eurozone and Poland will still fail, then we may have to deal with a severe sale of the zloty, which may even bring the dollar's quotations closer to around 4.00 PLN.