Pressure on euro and zloty may strengthen (Afternoon analysis 30.10.2018)

The halt in the depreciation of the main pair protected the zloty from further decline. However, black clouds still hang over the Polish currency.

Euro may deepen its drops

Tuesday did not bring good news for the euro. Today, Eurostat confirmed a negative scenario. The eurozone grew slower than expected by 0.2 percentage points per year in the Q3, with the reading at 1.7% being the lowest since the end of 2014. Italy, which suffers from economic problems, recorded a stagnation from quarter to quarter (an increase of 0.2% was expected), and the annual reading of 0.8% was lower than the market consensus of 0.9%, which already assumed a decrease from 1.2%.

The image of the eurozone's economic situation is not better when we consider the "soft" (survey) data published by the European Commission today. The overall sentiment index of consumers and entrepreneurs fell sharply in October for the sixth month in a row, reaching 109.8 points. The reading would not be so bad itself, given that the market consensus indicated 110.0 points, but at the same time the sentiment indexes of production and service companies also fell below expectations. The first fell to the lowest level since May (3.0 points) and the second since June (13.6 points) last year.

The EUR/USD quotations fell to around 1.135 today, although at around 3:00 p.m. they rose to around 1.138. The limited fluctuation range of the main currency pair does not mean that the pressure on the euro will not increase. It should be noted that the EUR/USD pair is still very close to the 1.13 boundary, and a fall below would be the lowest rate since June 2017.

The sentiment on the broader market slightly improved the quotations of share companies, which could have prevented the euro from deepening losses. The main market indexes in Europe reversed most of the losses incurred in the first phase of the day and the contracts for their US counterparts clearly gained (e.g. Dow Jones about 0.6%, and S&P 500 0.8%).

Destatis data on consumer inflation in Germany in October could have supported the common currency. Inflation increased by 2.5% year-on-year, by 0.1 percentage points above expectations and was 0.2 percentage points higher than in September. As expected, energy prices rose the highest (8.9% per year). Service prices, the largest and most important component of the main index for the German economy, also increased significantly from 1.5% in September to 1.8% in October.

The absence of increasing pressure on the euro was a good signal for the zloty. Although the Polish currency still remains relatively weak, it did not deteriorate until at least the beginning of its quotation on the US market. However, its price will depend on the market sentiment during the session in the USA. Given the strong declines in the US market over the last four weeks, further downward trend seems to be less and less limited (the index of the 30 largest Dow Jones companies is currently at the level of the first half of July), especially when it comes to the very good condition of the US economy.

The zloty may be threatened by the aforementioned renewed pressure on the euro. The market has all the arguments, and today it has received more to increase it. Taking into account current market events and macroeconomic data, if there is no global weakening of the dollar, e.g. due to the US Congress elections, the levels of 4.35 and 4.00 in the case of EUR/PLN can be quickly achieved. And tomorrow the next set of data that could potentially harm the euro and the zloty will be published.

Tomorrow's preview

Weak data from the eurozone puts increasing pressure on the euro, as well as on the zloty. Tomorrow it may still increase in case of weak data on price increases in Poland and the eurozone.

At 10:00 a.m., the Polish Central Statistical Office (GUS) will publish preliminary data on consumer inflation in October. The median of market expectations indicates that the level of 1.9% per year and 0.2% per month is maintained. Although it is not a core reading (excluding energy and food prices), inflation below expectations may weaken the already relatively weak zloty. Practically all macroeconomic data recently received from Poland is below market expectations.

At 11:00 a.m., Eurostat will present analogous data for the eurozone, but with core inflation (in this case with the exception of tobacco and alcohol). The market consensus assumes that the headline inflation rate will remain unchanged at 2.1% per year and that the core inflation rate will increase slightly by 0.1 percentage points to 1.0%. The probability of this seems limited, but a decrease of the latter below 0.9% would be the lowest level since April, and with the weak GDP growth data published for the eurozone today, this could significantly worsen the euro valuation, as well as have a negative impact on the złoty.