The Polish zloty and euro supported by a weaker dollar (afternoon analysis 25.01.2019)

The euro was in a slightly better shape, while the dollar lost value today - EUR/USD returned to just under 1.14. The rebound on the main currency pair, combined with a better sentiment on the equity market, helped the zloty to regain some yesterday's losses. However, black clouds gather above the Polish currency as the data from Poland and the euro area come ever weaker.

A weaker dollar

Yesterday afternoon we saw the dollar strengthening. Euro-dollar exchange rate reached its lowest level since mid-December - the EUR/USD exchange rate fell below the level of 1.13. With the appreciation of the US currency, the zloty was also clearly under pressure. Resilience of the Polish currency to changes in the value of the dollar somewhat decreased due to weak data from both the Polish economy and the euro zone.

Since the day started, however, the dollar was gradually weaker. The EUR/USD reversed most of the losses incurred on Thursday and the exchange rate approached 1.1380 with the beginning of the session on the New York Stock Exchange. The behaviour of the basket of the zloty was also correlated with the change in the main currency pair quotations. Until the beginning of the session in the US, the Polish currency made up for virtually all the losses incurred yesterday to the dollar and to the Swiss franc, and the exchange rates in both cases fell back below the level of 3.80. Limited changes can still be observed in the case of the euro-zloty exchange rate, although this is due to a series of weak macro data from the euro area.

Today's appreciation of the zloty was also supported by strong growth in the global stock market. Taking into account weak data from Poland and the euro zone, the probability of the dollar and franc appreciating to the zloty has slightly increased, while EUR/PLN exchange rate may gradually increase and exceed the level of 4.30 in the coming weeks (today approx. 4.29), although the range of fluctuations should be relatively smaller than in the case of the dollar or franc. A slightly different issue is the pound, which is approaching the level of 5.00 PLN, reaching almost 4.98 PLN yesterday. Admittedly, today the exchange rate has retreated by slightly more than 3 gr, but probably one positive information about Brexit may cause an increase above 5 PLN, which would mean the highest level since May 2017.

Whether this will happen quickly is a slightly different matter as Brexit is currently burdened with a great deal of uncertainty, despite the willingness of all parties involved to avoid the worst-case scenario (the so-called "hard" Brexit). What is practically certain, however, is that the price of the pound will be subject to high volatility. In the context of the zloty, next week will be important, as many important macroeconomic data will be published -from the euro area, the USA and Poland, among others.

Next week’s preview

Important macroeconomic data will start to appear from the middle of the week. Wednesday will see France's GDP data for Q4. On the same day, we will also learn about the sentiment index of consumers and entrepreneurs in the eurozone, as well as consumer inflation data in Germany in January. Recent readings in the euro area have been very weak, increasing supply pressures on the euro. Further portions of weak data can only reinforce this effect.

Also on Wednesday we will get to know important macroeconomic data from the USA. Until now, they have been in contrast with those in Europe. In the afternoon, GDP data for the fourth quarter won’t be presented due to government shutdown, however, ADP will publish a report on nonfarm payrolls in January. The discrepancy between the state of the US and European economy may increase, which may further weaken the euro.

In the evening, also on Wednesday, the Federal Reserve will issue a statement regarding interest rates. It is practically certain that they will remain unchanged. They may address concerns about the global economic slowdown and its impact on the US economy will be important. On the one hand, outlining this problem reduces the chances of two interest rate increases this year, and on the other hand, it can only reinforce the argument about the very good condition of the US economy in relation to the rest of the world, including to the eurozone. The direct impact on the dollar is therefore not obvious, although it seems that more factors currently speak in favour of a strengthening of the US currency.

On Thursday, another portion of important data concerning the largest economies of Europe and the USA will be published. Just before noon (CET) we will get to know retail sales data in Germany, consumer inflation in France and Spain and - probably the most important of them - the GDP of the euro zone in the fourth quarter. The faster-than-expected economic slowdown in the euro area crystallizes with virtually every macroeconomic reading, and further confirmations of this may significantly weaken the euro.

As on Wednesday, data from the USA will arrive in the afternoon "as a contrast", e.g. on initial jobless claims and PCE inflation. The former in the previous weeks have fallen to over 49-year-old lows and, although they are rather secondary in terms of their impact on the dollar, they underline the very good condition in which the US labour market currently finds itself. Inflation (core), in turn, has been slightly below the level of 2.0 per cent year-on-year and the probability that it will exceed this level is low. However, its current level supports the high GDP growth rate in the US, something we do not see in the single currency region in Europe.

Friday will be no less rich in macroeconomic publications. We will see the PMI data of the Polish manufacturing sector, which in December fell quite significantly below the level separating growth from decline (50 points) to 47.6 points. Eurostat will also publish the level of consumer inflation in the euro area in January, which may have a significant impact on the euro. In the afternoon, the US Department of Labour will present a monthly labour market report for January. The December report was very optimistic - both wages (positive for inflation) and employment growth (positive for GDP) increased more than expected. If January's data is also solid (in line with or above market expectations), the dollar may receive further support and continue its appreciation despite the uncertainty about the partial government shutdown and the path of interest rate increases in the US.