Market awaits ECB (Daily analysis 4.03.2019)

04.03.2019 13:11|Marcin Lipka

A positive report on a trade agreement between China and the US with limited impact on currency valuation. The message from the ECB may be dovish, but it is difficult to say how much of this mild message will be evaluated in the exchange rates until Thursday. The zloty is slightly stronger, but EUR/PLN is still around the 4.30 boundary.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • A lack of macro data may noticeably impact the analyzed currency pairs.

ECB in the limelight

The week on the broader market began with positive information. The Wall Street Journal's reports about the possibility of signing a trade agreement between the USA and China (around March 27th) triggered increases in futures contracts on S&P 500, and the main index of the Chinese market (Shanghai Composite) exceeded the 3,000 points boundary for the first time since June.

This information had little impact on the main currency pair's quotations, and the dollar was appreciating slightly. The Chinese yuan was strengthening, but the changes oscillated around 0.2%, which is not a significant movement. In the case of currencies, however, a greater impulse for change may be not the report on the trading situation (the normalisation of relations between Beijing and Washington may still take some time), but monetary policy issues and current economic reports.

On Thursday, the ECB is scheduled to meet. The monetary authorities in the eurozone will have a serious problem to discuss. The economic condition of the single currency area is deteriorating (inflation and GDP growth forecasts will be significantly reduced compared to the December estimate), but will Mario Draghi, the ECB's Chairman and his colleagues withdraw from the suggestion to raise interest rates at this point?

Leading indexes (PMI) still suggest that there is no acceleration in GDP growth in subsequent quarters. Moreover, inflation is clearly below the target (1.0% year-on-year in February in core terms). This may suggest that the ECB will postpone the suggestion of tightening monetary policy beyond 2019. Just like the market does. As a result, it cannot be ruled out that the key changes from the ECB will be seen this Thursday. This would send out a strong negative signal to the euro.

The market may already partially value the risk of such a decision. The morning drops in the EUR/USD pair below the 1.1350 limit are a sign that investors expect a mild message from the ECB, a strong downward revision of the key macroeconomic indexes and Mario Draghi's suggestion that the economic downturn is weakening and that increases are no longer the baseline scenario. However, it is not certain whether "forward guidance" (in the form of maintaining current interest rates until the end of summer this year) will be modified. On the one hand, this is a good time to do so (new macroeconomic forecasts), but perhaps such support will only be needed in June. Then a new TLTRO operation may be announced (cheap loans for banks, which are supposed to stimulate the economy).

If the ECB chooses to wait until June and the EUR/USD quotations fall by Thursday (the EUR/USD drop below the 1.1300 limit), with no change in key parameters (forward guidance, TLTRO) the main currency pair may even react with growths. It seems, that this response should not be particularly strong, especially since the next day data from the US labour market are published, and there is a possible surprise in the form of an increase in US wages, reaching 3.5% year-on-year (which is the fastest in 10 years). As a result, the volatility may be increased in the following days, but it is likely that the euro will remain under pressure, and the dollar may benefit from good information from the US economy.

Zloty appreciates

The zloty starts to pare some of the recent losses. In the morning, it reached 4.30 EUR/PLN, and the PLN/HUF pair moves close to the 73.5 level, which is higher than in the second half of February.

Investors clearly liked the prospect of fiscal stimulation. Part of it will be financed with foreign capital, and there is also a chance that the first move on interest rates will be increases, not decreases. On the other hand, it seems that the negative effects of fiscal changes (stimulating consumption, not investments or improving the competitiveness of the economy) by the zloty will not be measured now.

As a result, the risk of the zloty weakening when information is worse (e.g. there was no reaction to the weak PMI data from the Polish economy on Friday) is decreasing, and there is a growing chance that optimistic reports may relatively quickly have a positive impact on the zloty. Therefore, the EUR/PLN may slightly decrease and move below 4.30 boundary.


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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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