Unjustified optimism (Daily analysis 07.06.2018)

Solid increases on the US floor translate into a good sentiment in the eurozone. However, in the Old Continent, it is not justified in terms of macroeconomic data. The zloty was supported by the behaviour of global markets. EUR/PLN close to the 4.26. boundary.

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.

Upward trend on the EUR/USD pair

Only yesterday, it was possible to estimate that the EUR/USD increases were justified to some extent. The suggestion that the end date of the quantitative easing operation could be signalled at next week's ECB meeting is a positive sign for the euro (if it does materialise, of course). However, the subsequent growths in the main currency pair are already clearly on the rise.

Above all, the economic situation in the euro area is below expectations. For the fourth consecutive month, orders in German industry fell (this time by 2.5% month-to-month, seasonally adjusted). This brought the annual reading below zero (-0.1% year-on-year; adjusted by the number of working days), which is the lowest level in two years. Since the readings before and after Christmas were poor, they cannot be explained by a calendar issue. The data shows that demand weakened mainly in the euro area, which would be confirmed by earlier suggestions coming from e.g. PMI indexes.

There is no good data from Italy either. Retail sales fell by 0.7% MOM in April (expected to grow by 0.1%) after a 0.2% MOM decline in March. In annual terms, the decline was as high as 4.6% (the worst result since 2012). To some extent, the effect of Easter is visible here (a strong decrease in food), but apart from food, the annual sales growth is also negative, and it is the fourth month in a row (this time minus 2.3 YOY).

As a result, although the coincidence of seasonal and one-off issues (holidays, flu epidemics, releases) makes it difficult to analyse the actual economic situation, there are too many poor readings in the first four months of the year and, in addition, the leading indices (PMI) do not suggest any improvement. Therefore, a noticeable slowdown in growth is to be expected, which at the moment is unlikely to be assessed by the market.

Slower growth than consensus is also likely to reduce inflationary (underlying) pressures, which may revise the ECB's approach to further monetary policy in the coming months. The worse forecasts may not stop the exit from the QE, but are likely to delay the interest rate increase, which may not take place until the end of 2019. This scenario should burden the euro and in particular the EUR/USD pair, as economic trends in the US tend to justify a further tightening of monetary policy.

Stronger zloty

The national currency is doing well in relation to the euro or the dollar, as well as, for example, to the forint. The zloty is supported by good sentiment on the US market and further EUR/USD growths. EUR/PLN is quoted close to the 4.26 boundary in the afternoon.

A good sentiment in the USA may be justified to some extent, but the strength of the euro may not be justified (see previous paragraphs). Risks related to Italy, weaker than expected economic growth in the eurozone and low chances for interest rate rises in Poland, combined with the prospect of further monetary tightening in the US and still relatively high energy commodity prices, are likely to come to light again quite quickly. Then the zloty's condition may deteriorate again and the return of EUR/PLN to around 4.30 is not excluded in the following weeks. In the following hours, however, the good situation of the zloty should be maintained.