The European currency is clearly depreciating due to the expected fiscal easing in Italy. The euro is also under pressure from lower than expected core inflation. EUR/PLN remains relatively stable, but the franc and the dollar are clearly appreciating also in relation to the zloty.
The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.
- A lack of macro data may noticeably impact the analyzed currency pairs.
Italy is on the front page
Fear in the markets is clearly increasing every hour. Italian Treasury bond yields are a perfect example of this. They have increased by 35 basis points since the opening of Friday's quotations, reaching the 3.25% level. This growth is dictated by fears that Italy will begin to completely ignore the European Commission's suggestions regarding deficit and debt. Rome, on the other hand, will begin to implement a series of electoral promises made by the populist coalition.
Last night it was decided that a guaranteed income would probably be included in the budget. It is expected to cost around 10-12 billion EUR in the first year. This idea will increase the deficit to debt next year to around 2.4% of GDP. This is much higher than the European Commission expected in the spring (1.6%). Additionally, it should be remembered that Italy should actually reduce debt, not increase it. The Minister of Finance did not oppose popular ideas. As a result, Giovanni Tria remains in office, even though he was supposed to resign if the planned deficit exceeds 2% of GDP. Investors lose hope that in the current administration there will be a person who will take care of public finances.
The situation in Italy (strong increases in debt yields, drop in the FTSE MIB index by 3.8%, the highest since June 2016) also exerts pressure on the euro. The EUR/USD pair has fallen below 1.1600, which is more than 1% less than a day ago. Along with the movement on the main currency pair, we can also observe a decrease in EUR/CHF to below the 1.1300 boundary, which clearly illustrates the fear of the eurozone.
Drop in core inflation surprises
After high inflation readings from Germany, some market observers pointed out that this could affect the reading for the entire eurozone. However, we pointed out that base prices (excluding fuels and food) are also rising moderately in Germany. As a result, today we have seen a decrease in core inflation prices in the eurozone. It fell from 1.0% to 0.9% and it was expected to increase to 1.1%. This is definitely an argument for the ECB to maintain a mild approach to monetary policy. Moreover, confirming (already expressed in the EUR/USD exchange rate) that Mario Draghi's recent speech was misinterpreted by the market and that the President of the ECB did not intend to "smuggle" any particular information.
The combination of threats from Italy and a slower than expected increase in core inflation is negative news for the euro. In addition to Italy's economic issues, the political conflict between Rome and Brussels is also important. This may once again trigger a discussion on the stability of the eurozone as a whole, and thus stands as an important element, which is in favour of a decline in the euro's value in the coming weeks.
Zloty quite insensitive to global movements
The panic sale of Italian shares or bonds as well as the strong weakening of the euro and the strengthening of the franc do not have a serious impact on the zloty. The reaction of the zloty is quite limited, taking into account the behaviour of the basic markets. The EUR/PLN pair remains within the range of 4.27-4.28, and the zloty gains e.g. to the forint.
Much more serious movements are seen on the franc or the dollar in relation to the zloty. The CHF/PLN approaches 3.80 and the USD/PLN 3.70. It is difficult to say whether the opening in the USA will slightly reduce the scale of global fear. It seems that currently the most important information will be in the reports from Italy, which sometimes takes the form of panic, and creates the optimal condition for the zloty to strengthen.