Zloty depreciates (Afternoon analysis 29.10.2018)

PCE inflation in the USA in line with expectations, but revisions of data show that August was stronger in terms of spending and income for Americans. The dollar is appreciating slightly, although the changes are limited. Black clouds over the zloty. The euro's appreciation could help, but this is something which may not happen.

EUR/USD still around 1.14

Good sentiment on the equity market and falling yields of Italian bonds supported the euro today. The EUR/USD quotations were still above 1.14 around midday. However, the dollar was supported by good data from a report published today by the Bureau for Economic Analysis (BEA). Although the annual core inflation rate of PCE in the USA was in line with market expectations, it rose by 0.2% on a monthly basis and exceeded the consensus by 0.1 percentage points.

The monthly increase in American income in September was worse than the consensus by 0.2 percentage points and amounted to 0.2%, but August data was revised upward by 0.1 percentage points. Consumption spending was also revised up by 0.2 percentage points to 0.5%, as was real private consumption to 0.4%.

Although events other than the fundamental sphere (e.g. the potential impact of the US elections on Fed policy, the lack of S&P's cut in Italy's rating, good sentiment on the European equity market) currently support the euro and prevent a deeper depreciation of the euro against the dollar, tomorrow these positive factors for the single currency may have a weaker impact. Before midday, preliminary data on GDP growth pace in the eurozone will be published and if it clearly disappoints market expectations, we can observe a re-test of the 1.13 border in the case of the EUR/USD pair.

This would be a negative scenario for the zloty, where sales pressure is clearly increasing. Today, the EUR/PLN exchange rate rose above 4.32, which is the upper limit of the last 7 weeks. If the dollar continues to appreciate against the euro and there is weaker macro data from the eurozone, the EUR/PLN exchange rate may reach 4.35 in November. It is particularly likely because the zloty is not supported by strong fundamental data from Poland. Practically all recent data is clearly below market expectations. Both the USD/PLN and the CHF/PLN oscillated around 3.80 today. The implementation of the scenario described above may cause that in both cases the exchange rates will rise significantly above the level of 3.80 and will approach the limit of 4.00 before the end of this year.

Tomorrow's preview

At 10:00 a.m., the Italian Statistics Office (Istat) will present preliminary data on Italy's GDP growth pace in Q3. The median of market expectations indicates a slowdown from 1.2% to 0.9% per year. A lower reading may worsen sentiment on the market and also weaken the euro, as it could raise concerns about Italy's budgetary situation.

At 11:00 a.m., Eurostat will publish analogous data for the eurozone, where growth is also expected to slow down to 1.8% per year, from 2.1% in the previous quarter and 2.5% a year ago in Q3. Signals coming from the eurozone in recent weeks, including soft data like PMI, indicate that the slowdown may even be slightly more pronounced. This could only confirm the widening gap between current economic growth in the US and the eurozone and further weaken the euro. Worse than expected data would also probably have a negative impact on the zloty. A faster than expected market slowdown in the eurozone may also affect Poland's GDP growth pace.