More bad news for euro (Afternoon analysis 6.03.2019)

First the OECD, then the ECB (according to Bloomberg) cuts forecasts for the eurozone. The increase in interest rates in 2019 in the single currency region has been very uncertain for several months now, but the incoming information may reduce its chances for 2020 as well. The zloty remains stable during Wednesday's trading session, although Thursday may bring significant changes.

EUR/USD still around 1.13

Today's session on the currency market was held in calm moods, apart from the strong decreases in the Australian dollar (the GDP growth rate turned out to be 0.2 percentage points below the estimates). Market participants are waiting for tomorrow's statement and press conference of the European Central Bank (ECB). Relative calm could have disrupted OECD cuts in economic growth forecasts, especially for the eurozone. It is expected to develop at 1.0% this year, compared to previous forecasts of 1.8%. The downward trend in forecasts also affected the largest European economy - Germany is expected to grow at 0.7% year-on-year, as much as 0.9 percentage points below the November projection. The picture emerging from the OECD estimates is clear: there is a significant disproportion between the state of the eurozone economies and the USA which will increase even further this year and may have a negative impact on the euro valuation and may strengthen the dollar.

In the afternoon, data appeared on the US international trade deficit in December, which amounted to 59.8 billion USD and was 1.9 billion higher than market expectations. The negative balance of trade in goods and services increased in December to its highest level since 2008. This publication weakened the dollar slightly for a moment but was quickly masked by reports from Bloomberg referring to tomorrow's ECB-related events. According to anonymous sources, the ECB is expected to cut inflation projections until 2021. The cuts in inflation and GDP growth are supposed to be significant enough to justify a new long-term lending program for banks, called TLTRO (targeted longer-term refinancing operations). However, the ECB is said not to announce this tomorrow.

The EUR/USD fluctuation range increased with the publication of US and ECB data, but the exchange rate stabilised at around 1.1300 before the beginning of the New York trading session. However, incoming data are more and more likely to increase supply pressure on the euro.

Will it be negative for the zloty, it will turn out when the data from Poland are received. One of the elements, at least in the short term, may be the OECD projection of GDP growth. If the reduction in Poland is much lower than in the case of the eurozone, the zloty may react positively. In the following months, macroeconomic data from Poland may also be more important than usual. If industrial production, retail sales and inflation do not fail, combined with fiscal stimulation from the government, the chance for tightening of the Monetary Policy Council's message may decline. This may support the relatively good condition of the zloty despite the economic weakness of the main trading partners, i.e. the eurozone's countries. Exceptions may be the quotations of the dollar and the pound in relation to the Polish currency. In the first case, the global dollar appreciation may gradually push the USD/PLN exchange rate higher and higher, while in the second case the small risk of chaotic Brexit will most likely support the GBP/PLN growth by about 5-10 per cent by the end of the year.

Tomorrow's preview

At 1:45 p.m., the ECB's statement on the monetary policy will be published. Both interest rates and other tools available to the ECB will remain unchanged. At 2:30 p.m., a press conference with Mario Draghi, chairman of the ECB, will start. The economic slowdown in the eurozone is likely to encourage the ECB to revise its macroeconomic projections (GDP, inflation), which are currently very optimistic. This is particularly interesting in the context of today's OECD forecasts, which indicate that the eurozone economy will grow at 1.0% in 2019.

The ECB and Draghi have no argument for tightening the message. If the revision of macro data turned out to be as deep as the OECD, there may be suggestions that interest rates could be kept at the current level for a more extended period of time (the ECB statement now indicates that they will be left unchanged at least until the end of the summer). Even if such suggestions do not appear in the statement and during Mario Draghi's press conference, the market may still react with the euro depreciation if the cuts in expected growth and inflation are large.