ISM does not support the dollar (Afternoon analysis 7.01.2019)

Another weaker than expected PMI reading in the USA, this time from the service sector. The chances for a return of a stronger dollar are decreasing. The situation should be favourable for the zloty's stabilisation.

EUR/USD close to 1.15 handle

During the first trading hours of the Asian session, the US currency gradually depreciated. This trend continued during the trading period in Europe. Although data on orders in German industry in November turned out to be very weak, the single currency was supported by a faster than expected growth pace of retail sales in the eurozone (1.1% year-on-year against an expected decline of 0.7%). This was enough to clearly strengthen the euro against, among others, the dollar, pound and yen.

The EUR/USD quotations increased to approx. 1.1470 shortly after the start of trading on the New York stock exchange. The dollar is currently under supply pressure from recent statements by FOMC representatives, which point to a relaxation of monetary policy this year. Currently, therefore, more factors act against the dollar appreciation. However, this may change quickly if subsequent readings of the most important macroeconomic data (e.g. inflation and wages) or the situation on the equity and bond market (increasing spreads between the high and low ratings) improve.

Today, however, this is unlikely to happen. Again, ISM published worse than expected PMI data for December, this time for the services sector, which was 57.6 points and 0.9 points lower than consensus and 3 points lower than November's level. Although the terrible data of this leading index from industry were masked by very good data from the labour market, the chances for a rapid return of the dollar to the upward trend have decreased. Lower expectations regarding interest rate increases may eventually lead to significant increases in, among others, the equity market, which may translate into higher index readings than ISM in subsequent periods.

The weaker dollar and lower probability of interest rate increases this year is good news for the Polish currency. Excluding the USD/PLN pair, whose exchange rate fell to approx. 3.74, the zloty was marginally weaker today and the changes were within the ranges observed in the previous days. The EUR/PLN pair was oscillating at 4.30 and there is little evidence that this would change significantly in the following hours - the calendar of macroeconomic events is practically empty.

Tomorrow's preview

At 8:00 a.m., Destatis will publish data on industrial production in Germany in November. Today's data on orders in this sector has disappointed market expectations, although it has not worsened the euro valuation. Probably due to good retail sales data for Germany and the eurozone. The median of market expectations indicates an increase in industrial production by 0.3% per month. However, if the data fails, it may suggest a more pronounced slowdown in Germany than expected, especially since the middle of the year, the readings in this sector have been weaker than expected. In this case, the euro may weaken slightly, although this is also largely dependent on the dollar, which is currently weaker.

At 11:00 a.m., the European Commission will present data on the confidence index of consumers and businesses in the eurozone in December. Today's sentix index turned out to be higher than expected, which could have helped the euro. The market consensus points to a slight decline in this index from 109.5 points to 108.2 points in December. Moreover, it has been declining gradually since the beginning of 2018, although from a high level (17-year high), reflecting expectations of a slowdown in the economic growth pace. Recent market events may suggest that this index will decline, as will most of the indexes in this period based on surveys. However, the impact of this publication on the euro is likely to be rather limited - market attention should be more focused on interest rate expectations.