July positive for Europe (Daily analysis 24.07.2020)

24.07.2020 15:17|Bartosz Grejner

The US-China geopolitical tension intensifies. Another encouraging data from Europe, as well as the UK: PMI activity indexes rose in July well above expectations. The zloty is once again one of the strongest currencies of emerging countries.

Geopolitics and PMI

The sentiment on the market worsened yesterday afternoon due to the escalation of geopolitical tension. A few days earlier, the US decided to close the Chinese consulate in Houston - the reaction was fast. The authorities in China made a similar decision regarding the US consulate in Chengdu, in south-west China. In the meantime, US President Donald Trump also said that trade with China no longer means as much to him as it used to.

Reports of a further deterioration in US-China relations were contrasted again with positive news from Europe. Today, IHS Markit published the preliminary data of the PMI activity indexes of the industrial and services sectors in the eurozone for July. Although the economists' consensus was that the economy would emerge from the recession into a growth phase, economic activity turned out to be even higher.

Together these are positive signals about the recovery of European economies, which add optimism to the region following the agreement reached in Brussels on Tuesday. Although business expectations also rose in July, the data are not entirely positive. Employment continues to decline in both sectors, despite an already somewhat slower pace. However, the situation is worse in the industry than in services. Apart from the last three months, the pace of employment decline is the lowest in 11 years in industry and 7 years in services.

The main threat to European businesses right now is that increasing consumer demand may not keep pace with supply growth, resulting in further job losses. Therefore, the further shape of the growth path depends mainly on what kind of consumer demand will be reported in the coming months. After the first months of the "lockdown", the next ones will flatten out readings, and such positive data will be increasingly difficult to obtain.

Good condition of the euro and the zloty

The euro continues to be in good condition, although it did not appreciate today. The EUR/USD quotations fluctuated around the 1.16 boundary, practically at yesterday's closing level, but still at their highest levels since October 2018.

Another set of solid macro data from Europe also supports the zloty, which received positive impulses in the form of higher-than-expected readings from the Polish economy in recent days (e.g. industry, retail sales, consumer sentiment). The zloty was once again one of the strongest currencies of emerging countries today - just after the Czech koruna. The changes in its value in relation to the main currencies were moderate, but the zloty has been quoted at the lowest levels since 3.5 months in the case of USD/PLN (about 3.80) and since the first days of June in the case of EUR/PLN (approx. 4.40).

The British consume, and they revise the pound's rate

The zloty was depreciating slightly against the pound today, although the GBP/PLN exchange rate is still at its lowest level since mid-June, a moment in the afternoon it was about 3.84. Somewhat better condition of the British currency today results from higher than expected macro data from the Islands. Yesterday, the pound was under pressure following reports by EU chief negotiator Michel Barnier. He said that no progress had been made on the most important issues regarding the negotiation of the terms of the Union's trade agreement with the UK, and that agreement was unlikely to be reached with the UK's current attitude.

Today, this sentiment has slightly improved with ONS data on retail sales in June and PMI in July. Retail sales in the UK (excluding vehicles and fuels) increased by 13.9% on a monthly basis, exceeding expectations by 5.6 percentage points. A positive sign was an annual growth of 1.7%, suggesting that the UK has returned to consumption at a much faster pace than expected.

However, the test for this growth will be the following months, especially the autumn-winter period, with a possible second wave of the pandemic. The PMI indexes for the UK economy surprised similarly as for the rest of Europe: both sectors achieved growth pace above expectations, with services much stronger (56.6 points, 5.1 points) than industry (53.6 points, 1.6 points), reinforcing the current condition of the pound.


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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 the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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