Stronger dollar before G20 (Afternoon analysis 30.11.2018)

Slower inflation in the eurozone and Italy's weak GDP data weaken the euro. The dollar benefits from this, supported by better than expected Chicago data and uncertainty about the G20 weekend summit. Surprisingly weak inflation reading in Poland reduces the already low chances of raising interest rates in the next 12 months.

EUR/USD closer 1.13

In the afternoon, the dollar began to increase significantly. The EUR/USD quotations fell to around 1.1320, although there are still about 50 pips left to reach the level before the dollar weakened due to a statement by Jerome Powell, the Chairman of the Federal Reserve. The euro may be under slight pressure from worse than expected inflation. The main reading and core index disappointed market expectations by 0.1 percentage points, falling to 2.0% and 1.0% per year, respectively.

Italy's weak GDP data ( in Q3 recorded drop by 0.1% k/k) will certainly not have a positive impact on the single currency, especially in the context of the country's current deficit problem. In turn, at 3:45 p.m., the dollar received a positive impulse in the form of the PMI index of the industrial sector in the Chicago region. The index rose to 66.4 pts, 7.8 pts above expectations, to its highest level in 11 months.

Although the Chicago PMI is rather secondary data regarding its impact on the US currency's quotations, in the context of the weaker condition of the euro, today the dollar can pare some of the losses incurred in recent days. The G20 summit at the weekend should also be taken into account. The trade agreement between China and the US seems to be a little closer, but the uncertain outcome of the meeting of the Presidents of both countries may also be a burden to the market, supporting the dollar. The lack of agreement after the weekend is likely to strengthen it, and some form of agreement will weaken it.

For the zloty, the agreement between China and the USA, resulting in the absence of additional duties, would be positive. Today, however, the Polish currency lost due to a worse than expected inflation estimate (1.2% vs expectations of 1.6% per year). This is preliminary data, without a division into categories - we also do not know the more significant core inflation, so the reaction is limited. This reduces the chances of interest rate increases in Poland, which may translate into a slightly lower resistance of the zloty to external factors (e.g. appreciation of the dollar). The euro against the zloty was quoted around 4.29 PLN today, and the dollar and the franc around 3.79 PLN. The worst-case scenario for the zloty would be the lack of agreement between the powers mentioned above. In such a case, potential falls on the trading markets, and the appreciation of the dollar could lead to a serious weakening of the zloty in relation to the basic currencies.

Next week's preview

On Monday afternoon, the important publication for the dollar - the PMI index for the industrial sector by ISM - will be published. In the last two months, readings have failed to meet market expectations, and the index has gradually fallen. The resurgence of industrial activity could strengthen the dollar somewhat, especially in the context of the weakening of the dollar through the discussion of interest rates.

On Wednesday, the ISM will publish an analogous index, only for the services sector - it also recorded multi-year highs, only in September (since 2008, when the aggregated index was introduced). A positive reading could also support the dollar, especially since the last supply pressure seems to be somewhat exaggerated.

On the same day, the Monetary Policy Council's (MPC) decision on interest rates in Poland will also be announced. The changes are not expected, but the statement and press conference with the MPC Chairman, Adam Glapiński, may be interesting. Recent macroeconomic data from Poland was better than expected, suggesting a faster pace of development in the Q4. On the other hand, inflationary pressure is unlikely to increase in subsequent periods (e.g. by the decision to keep electricity costs unchanged for households). The zloty is in better shape due to the solid data. Significant deviations from the current message should not be expected, given today's much weaker than expected inflation data, which should be neutral for the zloty.

On Friday, the US Department of Labor will present a labour market report for November. This may be the most important publication next week. The most relevant part will concern data on changes in employment in the non-farm sector and the average hourly wage growth pace. In the context of the recent weakening of the dollar, market attention may focus primarily on wages, which have a significant impact on inflation. A change in the growth pace by as little as 0.1 percentage point since the October level of 3.1 per cent y/y (which is also the market consensus) would probably cause significant fluctuations in the dollar. An increase above this level could reverse the dollar's losses related to the dovish interpretation of the Federal Reserve Chairman, and could even strengthen even further.