PMI only in Germany meets expectations (Daily analysis 24.07.2018

Chinese yuan reaches the new yearly lows. The German PMI is good, but the rest of the eurozone is once again disappointing. Foreign trade is the limelight. The zloty is in a relatively good condition. The EUR/PLN pair close to the 4.32 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.

Much more bad than positive news from the European PMI

Tuesday's session started with a stronger dollar. This may be partly an effect of yesterday's quotations on the debt instruments market, where there were noticeable increases in yields of the US Treasury bonds and the approach of 10-year bonds to the 3% level. Today, the Chinese currency in relation to the dollar weakened to over a year's lows.

In the morning, the EUR/USD rate fluctuated close to the 1.1660-1.1670 limit, but after 9:30 a.m., it clearly rebounded (the euro was strengthened). It was the result of solid PMI readings from Germany. It concerned especially the industry, where the index prepared by IHS Markit reached 57.3 points with a consensus of almost 2 points lower and the June publication of 55.9.

In its research, IHS Markit focused mainly on the stronger production growth and new orders in German industry, as well as the continued good condition of the labour market. Export orders (three-month highs) also accelerated. Less positive in the context of manufacturing companies was a strong increase in factor prices (e.g. steel). In general, if taking only the readings from Germany, the PMI situation looks good.

Unfortunately, much worse PMI results can be observed outside Germany. The PMI, composed of services and industry for the eurozone as a whole, fell to 54.3 pts, which was the second-worst reading since November 2016. According to the IHS Markit survey, in July the composite index of orders for industry and services in the eurozone dropped to its lowest level since October 2016.

Apart from the main countries of the single currency area (Italy, Spain, the Netherlands, Austria, Ireland, Greece), PMI indexes were particularly weak. Growth for these countries (services plus industry) has been the lowest in 21 months. Moreover, there is little positive information in the summary of the data. According to IHS Chief Business Economist at IHS Markit, Chris Williamson, data for July is consistent with GDP growth of 0.4% (QOQ) in the Q3, i.e. by 0.1 percentage points lower than in April-June period this year.

Generally speaking, the PMI data should be perceived as poor, especially in the context of hypothetical trade restrictions between the US and the EU. This topic should attract a lot of attention in the market. On Wednesday, Jean-Claude Juncker, President of the European Commission, will meet with representatives of the White House. It is extremely difficult to predict the outcome of these discussions, especially because the US would like to address other issues (non-customs restrictions, subsidies or even defence issues) in addition to customs issues. The risk of negative comments on the Washington-Brussels relationship is relatively high. As a result, it appears that tomorrow's meeting may increase rather than decrease the downward pressure on the EUR/USD pair.

Limited number of events with impact on zloty

The next session on the zloty seems to be relatively calm. External signals despite reaching the Polish currency, have a limited impact. Also, movements on the zloty in the last hours take into account positive information (e.g. good data from Germany) to a greater extent than negative information (weak data from the eurozone, new lows on the yuan, higher yields on government bonds in the USA). This shows the relative strength of the zloty, probably in the short term.

The following hours should be relatively calm if the external signals are not extremely strong. Tomorrow afternoon, the zloty may experience greater volatility, as key information on future trade relations between the US and the EU begins to flow onto the market. Currently, the core scenario is the exchange rate close to current levels.