Pound and euro depreciate (Afternoon analysis 22.10.2018)

Brexit and Italy's budget deficit continue to have a negative impact on the pound and the euro. The zloty remains fairly stable.

EUR/USD below 1.15

Due to a set of macroeconomic publications, we observed relatively large fluctuations in EUR/USD quotations. The main currency reached 1.1550 just after 9:00 a.m., the highest level since last Wednesday, and has been gradually falling since then. At 3:00 p.m. it reached around 1.1470 level.

Today, pressure on the euro has been exerted mainly by two factors. The main factor was the issue of the Italian budget, as well as Italy's rating cut before Moody's on Friday. The EU will most likely reject the draft budget as presented by Italians, while on the other hand, the Italian side does not intend to withdraw from its excessive state spending. Negotiations will continue over the coming weeks, and Italy's subject is likely to have a negative impact on the euro. The second negative factor was the publication of the Bundesbank, which estimated that the German economy could remain stagnant in the last quarter and not grow at all.

The internal problems in the eurozone and the slowdown in economic growth are contrary to the situation in the USA. The gap between the two regions may only increase in the near future, which in turn may translate into a weakening of the euro.

The weakening euro and the dollar, which is thus gaining in global terms, have not been favourable to the pound even today. The British currency is under pressure from unresolved Brexit issues both internally and externally. The Brussels summit failed to establish anything new. Theresa May, Prime Minister of Great Britain, is also facing an aggressive opposition in the country. Her relatively weak political position within the country is also not good for the pound, as another factor of uncertainty adds to the already tense negotiations with the EU.

The pound lost around 1% to the dollar today, and the GBP/USD quotations fell below 1.30 for the first time since October 4th, just like the GBP/PLN pair. The price of one pound sometimes fell below 4.85 PLN. However, if we look more broadly, the zloty's quotations in relation to main currencies were relatively stable, given the market situation and the appreciating dollar. The EUR/PLN exchange rate oscillated around 4.29 before 4:00 p.m. and the USD/PLN pair around 3.74. The zloty's quotations should be subject to relatively limited volatility. This, however, may increase at the end of the week. On Thursday, we will receive a statement after the ECB meeting and a press conference of the head of the ECB. On Friday, in turn, preliminary estimates of US GDP growth in Q3 will be published.

Tomorrow's preview

The calendar of macro publications that could have a significant impact on the currency market is practically empty tomorrow. The main factors influencing the market will most likely continue to be the topics of Brexit and Italy. This combination should also include the publication of financial reports for Q3 of some of the largest American companies, such as Lockheed Martin, McDonald's or Verizon.

They mainly affect the equity market, but if the market consensus is exceeded during this period, this may give the market another argument for a very fast economic growth pace in the US. So fast that there may be a risk of overheating the economy, which may require a faster than the median path of interest rate increases. In such a scenario, the dollar could receive additional support and gain in terms of the relative weakness of the euro.