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Italy as a burden again? (Afternoon analysis 05.06.2018)

5 Jun 2018 15:30|Bartosz Grejner

Slightly worse than expected data from the eurozone weaken the euro - the dollar appreciates, the zloty drops. The Polish currency has few arguments to go in green.

EUR/USD below 1.17

Today, the final PMI data for the eurozone was published, which in the case of the services sector turned out to be worse than the preliminary readings (53.8 pts vs. 53.9 pts). Eurostat also released data on retail sales for April - while on an annual basis it met the market consensus (1.7%), it failed month-on-month (0.1% vs. 0.5%). The lack of a clear increase in sales is another argument confirming the slowdown of the eurozone's condition.

The new Italian Prime Minister's announcements of costly reforms, such as the "universal wage" (780 EUR) for the unemployed, may also weaken the single currency. While sentiment in the equity market remained positive, Italy's rising yields on government bonds may suggest that uncertainty has not disappeared and is likely to appear with the implementation of populist reforms in the Apennine Peninsula that could have a negative impact on the economy of the eurozone as a whole.

The dollar's appreciation and a drop in EUR/USD quotations around the day minima (approx. 1.167 at 3.00 p.m.) also contributed to the weakening of the zloty. The euro increased to nearly 4.29 PLN and the dollar to almost 3.68 PLN in the afternoon. In relation to these currencies, as well as to other basic currencies, the zloty depreciated, although the changes remained within the fluctuations' range of recent days.

However, if we look at the external situation (Italy, the weakening of economic growth in the eurozone, international trade tensions, rising interest rates in the USA) and internal situation (no prospects for interest rate increases during the year), the zloty has a greater potential for losses than the appreciation.

Today, the dollar may be strengthened by ISM data in the services sector, if PMI exceeds market expectations (as in the case of industry, 57.9 points). This would also be a negative sign for the zloty, especially if sentiment on the share market was also reversed, and we would observe a drop in the main indexes in the USA in the evening.

Tomorrow's preview

On Wednesday, the Monetary Policy Council will publish its decision regarding the following issues interest rates, which, however, will remain unchanged. However, the subsequent statement and conference of the MPC (4.00 p.m.) will be more important. Although inflation has risen slightly above expectations in recent months, it remains below the inflation target set by the Council. This limits the chances of changing the members' attitudes. Therefore, the impact on the zloty will be limited, and its prices will depend to a greater extent on external factors.

At 2:30 p.m. April's data on the foreign trade balance of US goods will be published. Taking into account the current situation and global tensions in trade issues, reading significantly above the consensus ( 49 billion USD deficit ) could cause the White House's reaction and slightly worsen sentiment in the market (negative for the zloty). At the same time, the Bureau for Labour Statistics (BLS) will publish the second reading of the change in unit labour costs in the Q1 in the US. Although the chances seem low considering that this is another estimation, an increase above 2.8% QOQ could slightly increase the probability of a faster monetary tightening in the US and strengthen the dollar.

5 Jun 2018 15:30|Bartosz Grejner

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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