Very weak data from Europe (Daily analysis 7.02.2019)

Industrial production in Germany and Spain incurred further drops - new lows were recorded on the EUR/USD. The zloty is slightly weaker, although the scale of changes is limited.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:30 p.m.: Initial jobless claims in the US (estimate: 221,000).
• 3:30 p.m.: Speech by Richard Clarida in Prague, Vice Chairman of the Federal Reserve.

More and more arguments in favour of a weaker euro

Another day, another set of dreadful data from the eurozone economies. Industrial production in Germany decreased by 3.9% on a yearly basis in December. This is only a slightly better result than the one observed in November, which after the revision amounted to minus 4.0%. However, it is a weak comfort for the largest European economy - in terms of changes in production in the sector, these were the two worst months for Germany in nine years.

This was not the end of the bad news from the single currency area. Although it was expected that industrial production in Spain would also decline, the year-on-year decrease by 6.2% was the highest in six years. This is not a one-off event in this case as well - production decreased by 3.2% in November. What is interesting, the decrease in activity in this sector was not reflected in PMI indexes (based on industry managers' surveys), which at the end of the year, although at low levels, continued to indicate growth.

The aforementioned data had to have an impact on the euro. The EUR/USD exchange rate fell to around 1.1340 after 10:00 a.m. (CET). This seems like a minor change given such weak data from Germany and Spain. Specifically because such large falls in industrial production at the end of last year may lead to a revision of GDP growth pace in both economies for 2018. This, in turn, may also lead to a lower number in the eurozone, which may put additional pressure on the euro in the coming weeks.

Some of the fears are becoming real. At 11:00 a.m., the European Commission announced that it had lowered the euro area growth forecast for 2019 from 1.9% to 1.3%. Cutting the GDP growth pace also affected Italy, which is burdened with serious fiscal problems. The cut, in this case, was even greater - from 1.2% to 0.2%. A weak growth pace may make it very difficult for Italy to overcome the problems related to the excessive budget deficit, which may further weaken the euro.

A slightly weaker zloty

More pronounced than expected slowdown in Germany and the eurozone as a whole is unfavourable for the zloty. Although the Polish economy does not show such a strong slowdown, the situation in the eurozone will have a negative impact on zloty over time as well. This is already visible in the Polish currency condition, which has gradually depreciated in relation to most majors in recent days. These are not significant changes, however, as a relatively better condition of the economy and higher interest rates than in the eurozone protect the Polish currency against more pronounced losses.

The EUR/PLN exchange rate returned to just above the 4.30 level, which is within the range observed since the end of November. The aforementioned slowdown in the euro area, combined with the outflow of most of the capital to the US may maintain pressure on the zloty also in the following weeks. However, this pair is subject to smaller changes than the GBP/PLN or the USD/PLN. In the first case, Brexit will have the greatest impact (its final form is still shrouded in a great deal of uncertainty). In the case of the dollar, if the divergence between the US economy and the eurozone broadens (and the economic slowdown in Poland progresses slightly faster than the current projections), the USD/PLN may continue the upward trend.