Surprise coming from eurozone supports the dollar (Daily analysis 21.08.2020)

Data from the eurozone indicate a slowdown in the industry and services sectors, which strongly deteriorates market sentiment and strengthens the dollar. As a result, the EUR/USD exchange rate falls to its lowest level since August 12th. The zloty is depreciating, but the data on retail sales in Poland are a positive surprise.

Unpleasant surprise from the eurozone

Friday morning brought new data from the eurozone. Unfortunately, there are more reasons for concern than for optimism. According to preliminary readings of the IHS Markit, the growth pace (measured by PMI indexes) of activity in the industrial and services sectors in the single currency area slowed down significantly in August. The PMI index of the services sector barely reached 50.1 points, which was a strong drop from July's 54.7 and below the expected 54.5 points.

The industry did not impress either. The PMI decreased slightly, from 51.8 to 51.7 points, but a further improvement to 52.7 points was expected. Before the eurozone aggregate data were published, French statistics were the first to be published, which could have already strongly cooled down optimism about the rapid return of economic activity in Europe. French industry moved back into recession, and the PMI fell to 49 points, although it was also expected to improve to 53 points (from 52.4 points in July).

The industry in Germany did not disappoint, with activity increasing from 51 to 53 points according to PMI (consensus was 52.3 points), but as in other countries, services clearly fell behind expectations. The PMI index for services fell from 55.6 to 50.8 points, being just over the line separating the recession in the sector from growth (50 points).

Today's publications of PMI data cast a considerable shadow over the eurozone economy's return to pre-pandemic conditions. The relatively good results of the fight against the pandemic in Europe, in contrast to what we observed in the US, were one of the fundamental factors supporting the strength of the euro in recent weeks. After today's publications, investors may pay more attention to the information about a strong increase in the disease in some regions of Europe. Until now, this has not had a significant impact on the euro, but it may now limit its potential growth.

Stronger dollar depreciated the zloty

After the PMI publications, the demand for the dollar increased significantly in the eurozone. The EUR/USD fell by 0.8%, from about 1.1883 to approx. 1.1760. This is the lowest level since August 12th, but only a marked (and permanent) fall below 1.17 may open the way for further strengthening of the dollar. Currently, this is not so easy, as the incoming macroeconomic data from the USA are rather mixed and do not indicate a rapid return of economic activity.

Deteriorating sentiment in the broader market and the dollar appreciating weakened the condition of most emerging countries' currencies today. The zloty was depreciating against the main currencies: the USD/PLN exchange rate rose to about 3.74, the EUR/PLN exchange rate to about 4.40, although this is not a fundamental change in the pattern of the past few weeks. Such changes may occur if the dollar continues its appreciation path, but this would probably require positive macroeconomic data from the US and a potential increase in coronavirus infections in Europe (and related restrictions). Macro readings, which are mostly positive, may to some extent protect the zloty from the country.

According to today's publication of the Polish Central Statistical Office (GUS), retail sales in Poland increased in July by 6.4% on a monthly basis, and what is even more important - by 2.7% on an annual basis (current prices). Market expectations indicated a decrease of 0.4% compared to July 2019, and instead, there is the first increase during the pandemic. As in the case of other countries, it was mainly driven by purchases of furniture, electronics and household appliances, where sales increased by 16.8% annually (15.8% if we exclude the impact of inflation). Although the zloty will be mainly subject to external factors, today's data indicating the resilience of consumer demand may be a positive signal for the economy and the zloty in the long run.