Will Italy make a deal? (Daily analysis 26.11.2018)

Weak economic data from Germany. Italy shows the willingness to deal with EC on budget. The zloty remains stable. The EUR/PLN in the range of 4.29-4.30.

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

• 3:00 p.m.: Mario Draghi's speech in the European Parliment.

Italy wants to set with EC

On Sunday in Brussels, representatives of 27 EU countries approved the negotiated agreement on Brexit. At this point, the next step is in the Isles, where the vote in the House of Commons should take place by Christmas. There is a strong probability that the first attempt will fail and the British Parliament will reject the agreement. Thus, the chance of strengthening the pound remains limited.

Apart from Brexit, Rome's willingness to settle relations with Brussels can be observed. There are signs from the Italian government that the deficit for next year could be revised to around 2%. (from the current 2.4 in the draft budget law). The European Commission, on the other hand, estimates that under the current conditions it will reach 2.9%.

It is difficult to say what kind of concessions Rome will accept and whether it will give up the most expensive plans. There is also a large difference in estimating the budgetary gap between the Italian and EC projections. The very fact that it is possible to return to negotiations seems to be positive. Investors have a similar impression, as the yields of the Italian debt in the early afternoon fell by 15 basis points and went down to around 3.25%. This also supports an increase in the EUR/USD pair.

There has been another surprisingly weak reading from Germany. The Ifo index fell to 102 points (expectations 102.3; previously 102.9). In addition, the index stopped close to lows reached one and a half years. On the other hand, looking at individual sectors of the economy, only the construction sector looks good all the time. The services sector is in a stable condition, and the trade (retail and wholesale) in the sub-index of expectations is decreasing to around 4-year lows.

The Ifo index has the worst results in manufacturing. The prospects and current situation are decreasing practically all the time, and the business climate index (combining current and future economic situation) is on less than 2 years lows. Ifo clearly confirms another index for the industry in Germany (e.g. PMI).

In a commentary to the data, Clemens Fuest, President of the Ifo Institute, wrote that together with other indexes, the results indicate an increase in Q4 of 0.3% q/q. He also added that the German economy is slowing down.

Given the average economic results from Germany and the eurozone as a whole, it is possible that Mario Draghi's speeches today will draw much attention. Investors can actively look for suggestions related to the extension of the period of the extremely mild monetary policy. As a result, despite the positive information from Italy, the euro may have problems with a more pronounced rebound of the recent losses.

Stable zloty

The Polish currency pared almost all losses incurred due to institutional issues. The EUR/PLN falls below 4.30. The zloty also costs more than 75 forints. Good economic situation observed at the beginning of the Q4 and the decreased concerns about other EM currencies (lower oil prices, chance for settlement between USA and China regarding trade war) support the zloty.

In the coming days, there are no signs of threats that could weaken the zloty. Therefore, the base scenario is the exchange rate of the EUR/PLN at around 4.29 level and a slight risk of the USD/PLN testing the 3.80 boundary, even if there are dovish suggestions during the speech by Mario Draghi at the European Parliment.