Zloty stable, so far at least (afternoon currency commentary 22.01.2019)

Poor economic data from the euro area will be weighing on the European currency. Retail sales in Poland below expectations, however their impact on the zloty was limited.

Few positive info for the euro area (and Poland)

The current situation is not the best for the euro. After a string of weak data from Europe's largest economies, a downward revision of the GDP growth rate of the euro zone by the International Monetary Fund, the ZEW Institute today added insult to injury with poor readings of its indicators of economists' sentiment. The main index of economic expectations for the eurozone did not differ significantly from the market consensus and was at -20.9 points (vs. -20.1 points), and for Germany it was even slightly better than expected (-15 points vs. -18.4 points). However, the assessment of the current state of the German economy fell to its lowest level in exactly four years.

Although we have not seen any very large losses on the euro today, the trend for the single currency remains unfavourable and the incoming information on the European economy only strengthens it. Euro-dollar quotations have been falling steadily since 10th January, and today, just before the opening bell on the New York Stock Exchange, they have fallen to around 1.1340, the lowest since 3rd January. Given the current conditions, the downward trend in EUR/USD may continue. The euro is somewhat protected against greater supply pressure by the partial government shutdown in the US, which has already been dragging on for more than a month.

However, the pressure on the euro may intensify this week. More specifically, on Thursday, when the European Central Bank (ECB) issues its statement and a conference with its chief, Mario Draghi, will take place. Weak economic data from the euro area is unlikely to remain without an echo within the ECB and the bank's expectations of economic growth for this year and the next could be revised downwards, as well as the balance of risks. With subdued inflation to date, this could reduce to virtually zero the probability of interest rate increases in the second part of this year. Even assuming a pause in monetary tightening in the US (although rates will probably be raised at least once), the dollar should gain in relation to the euro, taking into account the much better condition of the US economy.

The euro area is no exception to the recent weaker macroeconomic data. After a lower than expected growth rate in the industrial sector, in average wages and in producer inflation (PPI), retail sales data in Poland in December also turned out to be significantly lower than the consensus (4.7% y/y vs. 8.1%). However, the impact on the zloty's has been still very limited. The Polish zloty's basket remains very stable and has only slightly changed. EUR/PLN was quoted today in the range of 4.28 - 4.29, which was within the range observed in recent days. In principle, despite the economic slowdown in the euro area, the EUR/PLN exchange rate has been moving within a very limited range of for the last two months. The pound in relation to the zloty is strengthening gradually, which is natural and is a result from the global improvement of the British currency and expectations as to a softer Brexit. Most likely, however, given the weak data from both the eurozone and Poland, the relatively good condition of the zloty will be difficult to maintain. Therefore, the whole basket of the zloty may gradually weaken.

Tomorrow's preview

Even before the start of the session on European stock exchange, we will get to know the statement and economic forecasts of the Bank of Japan. One may expect an increase in the yen's volatility, especially as the international trade data in December for Japan will be available earlier at 00:50 a.m. (CET). The calendar of planned important publications and events in Europe is practically empty tomorrow. The market may already position itself for Thursday's events related to the European Central Bank, which may have a strong impact on the whole currency market.