Strong dollar (Daily analysis 26.10.2018)

The sentiment to the dollar remains good all the time. GDP data will be important not only because of the growth itself but also because of the reaction after publication. The zloty under pressure, but still the pressure is limited. The euro exchange rate fluctuates between 4.31-4.32 in the early afternoon.

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.: Preliminary GDP reading in the USA for Q3 (estimates: 3.3% q/q in annualised terms).

Reaction to data matters

Yesterday's ECB meeting was not a breakthrough. On the one hand, Mario Draghi, President of the ECB, did not ignore the latest negative economic information or events in Italy, but he tried to find arguments suggesting that part of the pessimistic estimates do not have to be realised at all.

Draghi suggested that he expected stabilisation between Rome and Brussels. At the same time, very weak industrial production may be linked to regulatory issues in the automotive sector. However, the ECB president stressed that it would be necessary to wait for new macroeconomic projections in December in order to assess the scale of the slowdown and the impact of recent events on the risk balance.

This has been a neutral appearance from a market point of view. The subsequent drops in EUR/USD can be considered as a result of general good sentiment to the dollar or increases in US Treasury bond yields, rather than the effects of Draghi's speech.

Today, the reading of the USA's GDP for Q3 will be the most important event on the market. The consensus of economists presented by Bloomberg assumes growth at the level of 3.3% Q/Q in annualised terms. The GDPNow model presented by the Federal Reserve from Atlanta shows a reading of 3.6%.

This means that forecasts without their annualisation suggest growth at the level of about 0.8-0.9% Q/Q. This, in comparison with the expected GDP growth of 0.3-0.4 for the eurozone, perfectly shows the economic divergence of these two currency areas, while at the same time driving the dollar growth against the euro.

Apart from comparing data with other economies, the reaction of investors to GDP data will also be important. This applies primarily to the debt market and, of course, the dollar. It seems that the data would have to be much lower than the forecasts (less than 3% in annualised terms) in order to evoke fears about the pace of monetary policy tightening by the Fed. Besides, even if such a low reading appears, the results of individual GDP components will also be important. If consumption and investment are strong and weaker readings are the result of a drop in stocks or a negative contribution from exports, the dollar should remain strong.

On the other hand, it seems that with values exceeding the estimates, the analysis of the components will be less detailed, because the data will simply confirm the current trend and strength of the US economy. So if there is no extreme bad reading, the EUR/USD is likely to remain under pressure, and the chance of reaching new lows over the year will remain relatively high.

Franc and dollar cost 3.80

The zloty is resisting higher sell-offs, but with the weakening economic situation in the eurozone, growing risks for the Polish economy and a mild MPC policy, threats to the Polish economy may increase. Today, the dollar is testing the 3.80 level, which means an increase of 0.30 PLN since the beginning of the year. The deepening of current trends (the strength of the US economy, problems in the eurozone, the slowdown in Poland) may push the dollar to around 4.00 PLN by the end of the year.

Taking into account the coming hours, the reaction to US GDP data will be of importance. It seems that only if the EUR/USD reaches new lows of more than a year (below the 1.1300 limit), it could significantly increase the zloty's depreciation. Without this strong impulse, the zloty will remain under pressure, but the dollar or franc should not increase.