The new week on the market begins with positive sentiments and a slightly weaker dollar. Industry's PMI indexes fail to meet expectations, but the sentiment saves the service sector. The zloty is stronger around midday; the EUR/PLN exchange rate drops close to 4.26, which is the lowest level in over a month.
For now, only hope for a recovery
In the morning, IHS Markit published preliminary data on PMI indexes for the eurozone. Although the aggregate data were almost in line with expectations, the industry is once again weaker. PMI in this sector fell to 45.9 points, 1.4 points below the market expectations and close to the bottom line of readings from the last seven years. However, the service sector was making up for this, with its 52.4 pts. increase being the highest level since September. A similar situation was observed in the case of both sectors in France and Germany. However, this is a rather weak comfort at the end of the year, because combined with slightly weaker data on industrial production and new orders in Germany, among others, it does not provide an argument for a quick recovery of European industry.
In a commentary to the publication, Phil Smith, Principal Economist at IHS Markit, wrote, among other things, that "Manufacturing continues to weigh heavily on private sector output, with faster decreases in factory production and employment in December causing the manufacturing PMI to tick down for the first time in three months". Smith sees hopes for "easing rates of decline in new orders and exports". The first phase of the US-China agreement may help in this respect, and these signs of recovery will be sought by market participants in the first months of next year.
However, the influence of PMI indexes was limited today. The weak situation of European industry is already largely reflected in the price, and the resilience of the service sector can be supported by the continuing positive sentiment in the market. Both the main indices in Europe and the futures contracts on their counterparts in the USA were gaining nearly 1%. (British FTSE above 2%). The dollar was slightly weaker, the scale of changes was small, and around midday, the EUR/USD quotations were about 0.2% above Friday's close, increasing to about 1.1150. The positive sentiment resulted from a mild message from the Federal Reserve, higher than the expected scale of Boris Johnson's election victory in the UK and the first phase of the US trade agreement with China.
New duties were not imposed on December 15th, and China obliged to increase its purchases of agricultural products from the USA. However, the fact that the current tariffs have not been significantly reversed and that the intellectual property issue has not been addressed, as well as the few details of the agreement itself, will probably prevent the dollar from appreciating in the short term. After last Wednesday's conference of Jerome Powell, the head of the Federal Reserve, it is clear that a strong emphasis is now being placed on inflation. As long as it does not enter the growth path, the rates will remain unchanged. However, this view can change quickly if the macro data suggest a change in the price trend. Therefore, inflation releases in the coming months will attract the attention of market participants and may cause significant changes in the valuation of the dollar (if they are above expectations).
Zloty supported by economic situation
No appreciation of the dollar and positive sentiment on the broader market is a good mix for the zloty's basket. Around midday, the Polish currency gained about 0.1-0.2% in relation to most of the basic currencies. The calendar of scheduled events for the rest of the day is empty, and we should not expect a significant change in the zloty if we do not observe a deterioration of sentiment on the US trading market in the second part of the day (the impeachment process in the US is currently a hot topic, but does not affect the market). Therefore, the EUR/PLN exchange rate should stabilise slightly above 4.26 and the USD/PLN exchange rate slightly below 3.83, both of which have remained at the lowest level for over a month.