Sentiment improves (Afternoon analysis 19.10.2018)

Weak sentiment at the beginning of the day did not last long. The main market indexes are appreciating, the dollar after reaching the highest value against the euro for two months begins to lose value. The improvement in the general market sentiment has helped the zloty, although it is likely to remain under supply pressure.

EUR/USD close to 1.15 again

The day started with the continuation of the dollar upward trend. The EUR/USD quotations fell to around 1.143, the lower level of the last two months. The sentiment was also markedly worse on the equity and bond markets, especially in Italy, whose yields moved upwards after criticism of Italy's budget proposal.

Along with the day, however, market sentiment improved. The main market indexes reversed losses, and Italian government bond yields started to fall. In this climate, the euro has also begun to pare the losses. The EUR/USD quotations moved to nearly 1.15 around 4:00 p.m.

The change in the market situation concerning quotations at the beginning of the day turned out to be beneficial for the zloty. The EUR/PLN exchange rate fell from nearly 4.31 to below 4.30, and USD/PLN from nearly 3.77 to 3.74. The improvement in the general sentiment on the markets, however, is likely to have a temporary positive effect on the zloty. Another set of worse than expected data from the Polish economy (this time retail sales) shows that it may enter the cooling of the economic growth pace a little faster. This increases the likelihood of a gradual depreciation of the zloty. The end of next week may be important for the Polish currency. The combination of the ECB and the publication of GDP data in the USA may also contribute to accelerating the pace of depreciation.

Next week’s preview

There are three major macroeconomic events next week. On Wednesday, the preliminary data of PMI indexes from the euro area, including the largest economies, will be announced. The index for the industrial sector has been gradually falling since the beginning of the year, from over 60 points to 53.2 points in September. The services sector did better, and the changes were not significant, but the index is also below the level at the beginning of the year (58 points against 54.7 points in September). The euro is currently under pressure from the strengthening dollar, as well as from Italy's budget and rising bond yields. A portion of PMI's weak data could further weaken the euro, as well as the zloty.

On Thursday, the European Central Bank (ECB) will publish a statement. There will also be a press conference of the head of the ECB, Mario Draghi. Changes in the press release should not be expected, but Draghi's conference should be more important, around which fluctuations in the currency market, in particular in the euro, are likely to increase. This conference may be important in the context of the latest minutes from the Federal Reserve, where a discussion took place on raising interest rates above a neutral level in the coming years. The emerging data does not support a tightening of the ECB's message (which would be positive for the euro), so a somewhat more neutral or even milder message can be expected.

On Friday, a preliminary estimate of US GDP growth rate in Q3 will be published. The US economy is currently growing at a very fast pace, with 4.2% y/y in the previous quarter. The next reading above the consensus (currently at 3.3%) can only reinforce the argument that interest rates must be raised at a faster pace in order to avoid overheating of the economy. In such a scenario, at the end of the week, we can observe a significant appreciation of the dollar, which, in turn, could cause significant pressure on the zloty.