Strong dollar and weak euro (Daily analysis 8.03.2019)

The market is still feeling the consequences of yesterday's ECB dovish meeting. Mixed data regarding industry in the main eurozone countries are published. The US labour market is in the limelight. The zloty pares some of yesterday's losses, but the dollar is still close to several months highs.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:30 p.m.: Data from the US labour market for February. Change in employment in the non-farm sector (estimates: 180,000). Unemployment rate (estimates: 3.9%) Change in average hourly wages (estimates: 0.3% month-on-month and 3.3% year-on-year).

Impact of the ECB statement

Yesterday's very dovish statement from the ECB caused a major reshuffle in the broader market. The euro recorded a drop of around 1% against the US currency, and the EUR/USD pair set new 20 month lows below the 1.1200 boundary.

The market reaction to yesterday's events was justified. This is not even a matter of prolonging the prospect of keeping interest rates unchanged or of another edition of low-cost loans to enterprises and households (TLTRO III). First of all, it is important that the ECB reacted very quickly to the economic slowdown and the decline in inflation prospects. The so-called function of the ECB's reaction suggests that if the economic downturn continues, quantitative easing could even be expected to return, although the discussion on this issue did not take place at the Thursday's meeting, as Mario Draghi assured.

According to the ECB statement "the balance of risk factors for growth prospects in the eurozone continues to be dominated by slowing down factors". Draghi even stressed this fact at the conference, which may suggest that the ECB is far from tightening monetary policy and that it is close to extending the ultra-mild approach in the case of a lack of improvement in macroeconomic data.

All of this means that the low euro valuation can last for weeks, months and even quarters. This could Moreover, the bar for investors to further weaken the euro is set low, and a bar for a strong rebound is set high, especially if macroeconomic data are still weak or mixed. Therefore, the euro depreciation observed in the last 24 hours was justified.

Data from eurozone countries and readings from the USA

In the morning, data on industrial orders for Germany were published. Both monthly and annual publications for January were clearly below forecasts, and even taking into account the upward revision of the December reading. There has been no improvement in the German industry. Orders dropped by 3.9% year-on-year. Foreign orders were weak (a decline by 5.1% year-on-year; negative reading year-on-year for the fifth month in a row). Domestic orders were also below zero (1.6%). Orders for intermediate goods are still disastrous (minus 6.3% year-on-year), while investment orders remain below the line (minus 2.5%). The industrial production will be published on Monday, but after today's orders data we should not expect positive signals.

Industrial production readings for Italy and France were better than estimated. In both cases, monthly data were positive, and in the case of annual readings, Italy managed to rebound from minus 5.5% in December to minus 0.8% in January. This to some extent reduces the extremely negative news from Germany.

Zloty is weaker, but there is no panic observed

The strong dollar appreciation after the ECB meeting also resulted in the US currency being really close to 2-year highs in relation to the zloty (3.86). This was also supported by the evening deterioration of the global sentiment, which pushed the EUR/PLN pair to the range of 4.31-4.3150.

Today, however, some zloty's weakening reversed, and the Polish currency reacted in the same way as other currencies in the region, which is why the panic is not visible. Also, the data from the USA will probably not change the zloty's situation. The dollar should remain strong, but ending the week at new highs in relation to the PLN (above the 3.86 level) is rather unlikely. In the long run, however, the zloty's condition against the dollar is likely to be weak, and further records against the USD/PLN may appear relatively quickly.