Afternoon analysis 21.04.2017

The market is preparing for Sunday’s election. Both the dollar and yen are increasing. The zloty is being sold due to anxiety over the election result. According to the Polish Central Statistical Office, both the economic growth and investments for 2016 were lower than expected.

Dollar is becoming stronger

Today, the EUR/USD went below 1.07 and the GBP/USD went below 1.28. The dollar’s strength was also indicated by the dollar’s index, which went near the level of 100 points.

The currency market has been reflecting the anxiety over the French presidential election today. The yen, which is considered to be one of the safe assets, increased against the pound, dollar and euro. Taking into consideration that the result of the French election may determine the fate of the eurozone, the EUR/JPY will most likely be very volatile in the forthcoming hours, as well as next week, depending on the election result.

The dollar may also be under the influence of today’s data regarding the PMI, which will be published at 15.45. The past two months were showing worse activity of both the industrial and services sectors. Currently, the market consensus indicates a slight increase. However, the US market finds the ISM more significant, therefore the potential impact of the PMI data will most likely be limited.

Zloty is clearly weaker

Due to the forthcoming election in France, the zloty has been losing significantly against the main currencies. Both the euro and franc increased to their one-month maximum. Moreover, the USD/PLN reached its two-month record. The CHF/PLN went above the 4.00 level for the first time since March 23rd.

According to the Polish Central Statistical Office (GUS), Poland’s GDP growth for 2016 was at the level of 2.7% YOY (estimates: 2.8% YOY). This data also had a negative impact on the zloty. Every quarter of 2016 has been revised down – by 0.2 percentage points for the fourth quarter and by 0.1 percentage points for every other quarter. Moreover, the decrease in investments was also worse than estimated (negative 7.9% YOY vs negative 5.5% YOY). Over the next few days, the zloty should be determined by the sentiment related to the French election. If Jean-Luc Melenchon makes it to the second round, this would continue the overvaluation of the zloty and may cause the EUR/PLN to go above 4.30.

Next week’s events

Next week, the currency quotations may be determined by the result of the French election’s first round (on Sunday). If both Jean-Luc Melenchon and Marine Le Pen make it to the second round, investors may become anxious and the risk aversion may increase. The latter would cause the sentiment towards the emerging market currencies to deteriorate. However, if Melenchon doesn’t make it to the second round, this would be a relief for the market.

On Thursday, the European Central Bank will announce its decision regarding interest rates and the QE program, which are both expected to remain unchanged. However, the ECB announcement will be significant. Last month, the Bank’s message seemed to be relatively hawkish at first, but the ECB members had been easing this in the following days. Therefore, the forthcoming ECB announcement may cause increased volatility on the euro.

On Friday, we will know the initial GDP growth for the first quarter in the United Kingdom, as well as in the USA. These readings may increase the volatility of both currencies. The pound has been particularly vulnerable to macroeconomic data due to Brexit, as well as the recent announcement of early election in the United Kingdom. The dollar’s reaction will most likely be less intense. This is because the American currency seems to have been under the impact of the decisions from the US administration.