The week started with PMI readings, generating mixed sentiments. Poland’s core inflation remains anchored. The entire market, led by the EUR/USD, is awaiting the FOMC decision.
Unfounded Optimism
Monday’s session brought a series of PMI readings. Surprisingly, service sector results in major European economies rose, in some cases surpassing the 50-point threshold. This was particularly surprising in Germany. However, progress is visible in almost all countries, which naturally affected the overall eurozone result. The reading also exceeded the 50-point threshold, reaching 51.4 points.
The situation in the manufacturing sector is significantly worse. Not only are the results well below the threshold, but sentiment is also further deteriorating. In Germany, PMI came in at 42.5 points, and France fared even worse at 41.9 points. Since the two largest economies are struggling, the eurozone result is similarly disappointing. The figure of 45.2 points indicates that recovery is still far off. Interestingly, the UK followed this trend, where services showed positive surprises while manufacturing continued to decline.
A Heavier Anchor
Locally, the GUS (Statistics Poland) report on core inflation is worth noting. The reading came in at 4.3%, in line with consensus, marking an increase of 20 basis points compared to the previous month. Additionally, inflation excluding the most volatile prices reached 5.3%, confirming October’s result. Given the tone of recent statements by President Glapiński, today’s reading might be used as an argument to delay discussions on interest rate cuts.
Italy’s price dynamics are also interesting. On one hand, inflation rebounded from 0.9% in October to 1.3% in November. On the other hand, the month-over-month result indicates slight deflation. Additionally, the week started with rather poor data from China.
Retail sales disappointed the most, slowing to just 3%. This is yet another sign of how capricious consumers have been recently. This is particularly noteworthy because many analysts see consumer spending as a potential savior for the European economy.
Scissors in Motion
The main event of the week is Wednesday’s FOMC decision on interest rates. The market is fully convinced that we will see a rate cut to the 4.25-4.50% range. Therefore, the FED’s predictions — particularly the so-called “dot plot” — will be more important than the decision itself. Currently, the market is pricing in just three rate cuts for 2025, though this outlook has been quite volatile recently.
On the other hand, FOMC members have so far been much less inclined to cut rates compared to market expectations, making it unlikely that the dovish camp will receive a strong signal. Nevertheless, the dollar is holding off on committing to a direction, a trend likely to persist until Wednesday. As a result, the $1.05 level will act as a magnet for the EUR/USD pair in the coming hours. This also affects the Polish złoty, which is starting the week fairly stable. The euro costs 4.26 PLN, while the dollar is 4.06 PLN.
Author: Krzysztof Adamczak, Currency Analyst at Walutomat.pl
Source: ManagerPlus
