Mixed data from the US, but can benefit the dollar (Afternoon analysis 18.01.2019)

18 Jan 2019 16:55|Bartosz Grejner

Industrial production in the US grew above expectations in December, although consumer sentiment has fallen significantly. The dollar may gain, despite the continuing partial government shutdown. Worse-than-expected data from the Polish economy had only a limited impact on the zloty, but the likelihood of its weakening has increased.

More risks for the euro than the dollar

Today, the market have received further evidence of the current high contrast between the US and euro area economies. Industrial production in the US in December increased by 0.3% year-on-year, above expectations of 0.2%. Its most important component, i.e. manufacturing production, has also increased by 1.1%, 0.8 percentage points above the market consensus. Utilities sector recorded the lowest overall reading in December with a 6.3% drop. The month-to-month data may be volatile , but on an annual basis the production showed a 4% increase, and the rate of growth has been gradually increasing since the beginning of 2016.

Positive "hard" data today were in little bit of contradiction with "soft" data from the US economy. The University of Michigan Consumer Sentiment Index fell to 90.7 pts in January, down 6.1 pts below expectations. This was also the worst reading since the beginning of Donald Trump's term as president. There are several reasons for the decline in the sentiment, the main ones being the partial government shutdown, significant drops in the stock exchange, tariffs imposed by the US, uncertainty about the monetary policy and fears of a global economic slowdown. With the exception of the latter, uncertainty about the situation in the US alone should be clarified relatively quickly. Eliminating these uncertainties, consumer sentiment is likely to improve in the coming months, although concerns about the global slowdown and its impact on the US will remain.

As a result, despite the low index of the University of Michigan, better-than-expected data from the industrial sector are likely to support the dollar. However, changes in the euro/dollar exchange rate have so far been limited - the EUR/USD was quoted today at around 1.14, and after the publication of the US production data slightly below this level to approx. 1.1360 an hour after the beginning of the session on the New York Stock Exchange. At present, the growth potential is mainly hampered by the entering its fifth week government shutdown. The sooner it ends, the better for the dollar's value. The median of expectations of economists surveyed by Bloomberg indicates that it will end in mid-February. However, the Federal Reserve is currently more cautious about raising interest rates, which fundamentally weakens the growth potential of the US currency. Next week may be important in this respect - data from the euro area and the stance of the ECB in the light of the economic downturn may provide support for the dollar.

These events will also be important for the zloty. Data from the Polish economy for December - on industrial production, average wage growth and producer inflation (PPI) - were significantly below expectations. They are beginning to reflect the trend recently observed in the largest European economies. However, their impact on the zloty was limited today. The EUR/PLN exchange rate continued to move around 4.29, but in the following trading days the supply pressure on the zloty may increase. An important factor for the Polish currency will be next week, which will be abundant in events that could potentially weaken it.

Next week's preview

A number of significant events are planned for the next week, hence we can expect an increase in the level of volatility on the market. Monday will start with the publication of important data. Even during the session in Asia, we will get to know data from China on GDP growth rate in Q4, industrial production, retail sales and fixed investments in December. If concerns about the economic slowdown materialize in the form of worse-than-expected readings, the risk of weaker demand may weaken the euro and also the zloty.

Planned for Monday is also a debate on the "plan B" of the Brexit. Significant movements of the pound are to be expected. The market predicts a softer withdrawal from the EU, which has lifted the pound's valuation in recent days. Should the talks in this matter become more complicated, the pound could be brought much lower.

After worse-than-expected figures for wages and production in the industrial sector in December, retail sales data for Poland will be published on Tuesday. If the decline in the growth rate turns out to be greater than the market expects, this may be another argument for the weakening of the zloty. On the same day, the ZEW institute will present data on the sentiment of economists in January, . for the euro zone and Germany, among others. The mood is unlikely to improve significantly after the latest weak data on industry and GDP. The situation is somewhat alleviated by the optimism resulting from the recent reports on negotiations between the US and China and the price increases seen in equities. Poor readings may weaken the euro, although market attention is likely to focus on Thursday's developments in the single currency region.

Recent publication from the eurozone did not instil optimism, one could even say that they were disastrous - both for industrial production and PMI. On Thursday before noon, IHS Markit will publish preliminary PMI index data for January. The median of market expectations does not point to strong deviations from previous values, but if the readings nevertheless fail to meet them a post yet another decline, the euro may be under considerable pressure.

Later on the same day a probably even more important event will take place: a statement and a press conference of the European Central Bank (ECB). Interest rates will not change, and most likely the statement's wording will not change either. However, the ECB's expectations of future growth may change. It may be revised slightly downwards. Similarly, the risk balance for the euro area economy may move downwards in the eyes of the ECB. This could increase supply pressure on the euro, although, on the other hand, significant depreciation could be limited by an increasing chance of a pause in monetary tightening in the US this year. A potentially cheaper euro would not be a good signal for the zloty either. The weaker outlook for the euro area in the light of worse than expected data from the Polish economy may also weaken the zloty.

18 Jan 2019 16:55|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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