US growth above expectations (Afternoon analysis 26.10.2018)

26 Oct 2018 16:15|Bartosz Grejner

The dollar got another impulse for growth. The EUR/USD pair is getting closer to 1.13. The Polish currency is slightly weaker. Next week is full of important macroeconomic data, which may contribute to fluctuations in the currency market.

Will EUR/USD test 1.13?

Yesterday evening increases in the main indexes in the USA did not improve sentiment. At the end of the trading session, futures contracts lost sharply, due to the publication of quarterly reports of some companies in the USA. This situation also influenced Europe, whose markets were under great pressure likewise. The German DAX index of the 30 largest companies fell during the day to its lowest level since December 8th, 2016.

The global increase in aversion to more risky assets also caused an increase in demand for the dollar and the yen, which were clearly appreciating in value. The quotations of the main currency pair, i.e. EUR/USD, fell to around 1.133 today, and it is really close to its lowest level since the end of June last year.

The euro is certainly not supported by the pressure on shares. Today the dollar has also received a positive signal in the form of a better than expected reading of the economic growth pace in Q3 of the USA, which amounted to 3.5% per year, exceeding expectations by 0.2 percentage points. Attention is drawn to the strong growth in consumption, which may be justified by the fiscal stimulation of the state. US consumer spending in Q3 increased by 4.0% Q/Q in annualised terms, recording the fastest growth pace since the last quarter of 2014.

The zloty was slightly weaker today, and the euro reached nearly 4.32 PLN and the dollar and franc at 3.80 PLN each. Sale panic on the zloty is not yet visible, although both domestic and regional information does not promise strengthening in the long run. Today's zloty quotations will largely depend on the main currency pair's behaviour. A drop in the EUR/USD exchange rate below 1.13 would be fully justified by today's data and could weaken the zloty, which pared some losses in the afternoon.

Next week's preview

Next week will be important for the currency market in terms of macroeconomic publications. On Monday, the Bureau for Economic Analysis (BEA) will publish PCE inflation data in September in the USA, which the Federal Reserve takes into account in its macroeconomic projections. The median of core index expectations, excluding energy and food prices, indicates that it remains unchanged at 2.0% y/y. Taking into account significant fluctuations on the currency or stock exchange market, the deviation of 0.1 percentage point may result in an increase in their scale. Especially, an increase in the PCE index above consensus may further strengthen the already strong dollar, which may also have a negative impact on the whole zloty basket.

On Tuesday, the preliminary eurozone GDP data for Q3 may turn out to be very important for the single currency. Recently, there have been more and more signals suggesting that the slowdown in the eurozone's growth pace has been faster than expected. The market consensus indicates that the single currency economy grew at a rate of 1.8% per year and 0.4% per month. Readings below, especially by more than 0.1 percentage points, may weaken the euro, which may also exert supply pressure on the zloty.

The following day will see the publication of another set of important data: preliminary data on consumer inflation in October in both Poland and the eurozone. In both cases, weak macroeconomic data or internal problems (e.g. Italy) weaken the currencies of these regions. Weaker than expected inflation could mean a reduction in the probability of monetary tightening, which could result in increased pressure on both currencies.

The week will end with a publication that is just as important: on Friday, the US Department of Labor will publish a monthly report on the US labour market. The most important data will regard changes in employment in the non-farm sector and, in particular, the growth rate of average hourly wages. This report very often causes significant fluctuations in the currency market. The US economy is currently developing at a very fast pace, which is confirmed by the data received so far. Monetary policy may even tighten more than expected to protect the economy from overheating. This rather limits the potentially negative impact of Friday's report, if the data turns out to be slightly worse than expected. The data is also sometimes distorted by seasonality, single events or a small sample. Taking into account the current market situation, the dollar has more to gain, and its losses may be limited - in contrast to the zloty.

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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

See also:

26 Oct 2018 13:54

Strong dollar (Daily analysis 26.10.2018)

25 Oct 2018 16:26

ECB with small impact, euro weakens (Afternoon analysis 25.10.2018)

25 Oct 2018 12:24

Important ECB meeting (Daily analysis 25.10.2018)

24 Oct 2018 15:50

Waiting for ECB statement (Afternoon analysis 24.10.2018)

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