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Market awaits for impulses (Daily analysis 05.06.2018)

5 Jun 2018 13:04|Marcin Lipka

Eurozone average data but better than expected in the UK. In a week's time, a significant Federal Reserve meeting will begin. The zloty remains stable slightly below the 4.30 PLN limit for the euro.

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

  • 4.00 p.m.: ISM index of the US service sector. May's reading (estimates: 57.6 pts).

Eurozone left behind

Publication of final PMI indexes from the eurozone confirmed its weak condition. The overall PMI index (services and industry) is at its lowest level in the last year and a half and amounts to 54.1 points.

Apart from the months' lows, readings in Italy are under political pressure in Germany and France. The Italian services sub-index of sentiment has fallen to its lowest level in less than two years. It is clear that the eurozone is coping with some problems. It is unclear it is more a result of one-off factors (unstable winter weather, many flu-related health releases, long weekends) or if the structural problems are recurring (e.g. politics and the situation in the weakest economies - e.g. Italy).

On the other hand, data from the UK was clearly better than expected. (PMI reached its highest level in three months, 54 points vs. 52.8 points in May). Although the data is not spectacular and in the IHS Markit survey on Brexit it is still one of the main risk elements, the situation in the Islands is closer to stabilisation than in the euro area. This is also confirmed by the currency market today, where the pound strengthened by 0.5% in relation to the euro.

Fed decides in a week's time

Besides political and economic information from the European Union, the market will soon start to speculate about next week's Fed meeting. From today until next Wednesday, FOMC members will not speak on monetary policy, so only archival statements will remain to be analysed.

It seems that FOMC should not be overly concerned about the situation in Italy. The issue of hypothetical trade wars with US partners, or reports related to immigration, may cause more anxiety. However, there is limited chance that any of these elements will be strong enough to reduce the pace of future interest rate increases.

However, the recent acceleration of inflation, the good situation on the US market, good data from the labour market, a significant budget deficit this year (about 5% of GDP) and the GDP growth of 4.8% in the Q4 indicated by Atlanta Fed may contribute to the fact that the Fed in June, however, will suggest a total of four interest rate rises for the whole 2018 (in March, the median of expectations indicated three rises). This could support the dollar by showing that FOMC is relatively determined to bring monetary policy relatively quickly to a neutral level (approx. 2.50-2.75%), and then wonder whether it is not worthwhile to act on the economy through a restrictive approach, which slows down the economic recovery.

Zloty relatively stable

The relatively good sentiment present on the US market led the EUR/PLN pair below the 4.28 level in the morning. Around noon, the zloty is already slightly weaker, but the calm situation on the broad market should rather stabilise the Polish currency in relation to the franc, the euro or the dollar.

Stability also remains also as the baseline scenario for the days ahead, despite tomorrow's MPC meeting. In the long run, the zloty's situation does not look good. Problems with Italy will reoccur (once the populist parties start to implement their announcements), which will not improve the situation in the region. Also, the US monetary policy and probably still quite high prices of energy resources will absorb capital from emerging markets, causing pressure on the currencies of these countries, including the zloty.

5 Jun 2018 13:04|Marcin Lipka

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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