Leaders in Europe are getting closer to an agreement (Daily analysis 20.07.2020)

EU leaders are closer to an agreement by which they allocate 750 billion EUR in grants to help mitigate the economic consequences of the pandemic. The details of the agreement, such as concessions to a group of countries that are not willing to overspend, and the management of the programme may be problematic.

The euro still above 1.14

Monday is the fourth day of the Eurogroup summit. According to Bloomberg, the four somewhat more frugal countries (Austria, Denmark, the Netherlands, Sweden) would be satisfied if the 390 billion EUR aid package were to be provided in the form of grants out of 750 billion of the total programme.

This is 110 billion less than the original proposal and 10 billion less than the minimum proposed by France and Germany. The amount no longer seems to be a problem. However, the number of rebates that Austria, Denmark, the Netherlands and Sweden want to receive and how the programme will be managed may still be a matter of dispute. The talks are to resume today at around 4:00 p.m.

This is the most important event of the day, and it is the main focus of the market. The sentiment is still positive. There is a conviction that European leaders will reach some kind of consensus on the economic recovery programme.

Today, the EUR/USD quotations increased by about 0.3% around the midday, and the EUR/USD exchange rate reached about 1.1467, the highest level since March 9th. This is close to crossing the next boundary of 1.15, which in turn, would mean the highest level since January 2019.

Surprise from Poland

The weaker dollar and the good condition of the euro are factors favouring the zloty, which today also gained positive impulses in the form of national data. According to a publication of the Polish Central Statistical Office (GUS), industrial production in Poland increased in June by 13.9% compared to May, although it was expected to increase by barely 6.5%.

There was also a surprise in production on an annual basis. As early as in May, we observed a drop of 17%, while in June it unexpectedly increased by 0.5% year-on-year. Good effects of coping with the pandemic in Europe support the zloty in recent weeks, and positive data from the internal market may further improve its condition.

That was in today's quotations. Along with the rouble, the zloty was the strongest currency of the emerging countries. The EUR/PLN exchange rate dropped to about 4.46, which is the lower limit of the last two weeks. On the other hand, the global weakness of the dollar combined with a relatively better situation in Europe and Poland contributed to a decrease in the USD/PLN exchange rate to approx. 3.89 PLN, which is the lower boundary since the second week of March.

Positive signals for the zloty should help to maintain its good condition and even slightly strengthen it against the main currencies. The most important event for the market and for the zloty is now what will happen in Brussels. Market expectations are high, and the consensus is likely to be reached. The details of the agreement, i.e. whether the compromise in favour of the frugal countries was not too far-reaching, will be important for market sentiment. Depending on the outcome of the negotiations this evening and tomorrow morning, we can expect a significant increase in the volatility of the currencies.