Italian elections as burden (Afternoon analysis 05.03.2018)

Current high volatility in the market has limited impact on the zloty. However, the election results may still significantly change market sentiment.

High volatility on the market

Weekend events have had a strong impact on today's situation in the market. The threat of increased tariffs among the largest countries, combined with the increased uncertainty surrounding the election results in Italy (still no official data, therefore it is hard to say which party will rule) have clearly worsened market sentiment. On the contrary, SPD party support for Angela Merkel's government has introduced balance, which eliminates the factor of uncertainty in Europe's largest economy after many months and could have a positive impact on the euro in the long term.

The main currency pair's quotations (the EUR/USD pair) were close to 1.23 around 3:00 p.m. However, fluctuations in the previous hours were relatively high - the exchange rate fluctuated between 1.227 and nearly 1.234. Data on the PMI index for the service sector compiled by ISM will be published at 4:00 p.m. In theory, it could have a significant (positive) impact on the dollar's quotation, especially if the result of the previous month was repeated (59.9 points).

Today, the political issues can play a significant role. If perceived as Eurosceptic and populist parties are to form a government in the Italian Parliament, sentiment in the market may deteriorate. The euro's weakening, combined with the dollar's strengthening and likely decline in the main market indexes could have a negative impact on the zloty's quotations. The zloty, taking into account the circumstances and increased risk aversion, was relatively stable - it lost about 0.2% to 0.3% in relation to the main indexes. Sentiment deterioration during the second part of the day may deepen the zloty's losses.

Tomorrow's preview

The US Census Office will publish January's data on factory orders in the industrial sector at 4:00 p.m. In November and December, they increased by 1.7% per month in both cases. In January 2018, according to the market consensus, orders may fall by 0.4% compared to December, which would be the first decrease until July of last year.

The aforementioned data may be a relatively good indicator of the future industrial production's results. Given the current very large fluctuations on the market and in the dollar or the euro's valuation, the reading significantly differing from the consensus (+/- about 0.5 percentage points) may influence the US currency's quotations.

Ultimately, impact may be limited. The market's attention on political and economic issues (the German coalition, uncertainty after the elections in Italy, the risk of escalating customs barriers) will be effective in distracting investor's attention from macroeconomic data. It is likely that only Friday's report from the labour market in the USA could cause a significant reaction in the market - especially if the data on the average wages growth pace deviates from the market expectations (2.8% growth YOY).