Afternoon analysis 22.05.2017

The beginning of the week marked a further weakness of the dollar. Angela Merkel’s comment helped the euro. The zloty remained strong and there seems to be no immediate threat of a slump.

The dollar drops even more

There were no important macroeconomic events planned for today, so last week’s sentiment was still present on the markets. The US currency was visibly lower yet again: the dollar’s index (DXY) deepened its six-month lows further and dropped below 97 points for the first time since the US election in November.

This was mainly caused by the increase seen in the EUR/USD pair, and the increase itself was probably caused by Angela Merkel’s comments. During a discussion with students in Berlin, the Chancellor of Germany said that the euro is too weak because of the European Central Bank’s policy and that causes German products to be cheap in relative terms. That, in turn, adds to the substantial trade surplus of the biggest economy in Europe.

The EUR/USD pair increased as high as 1.125 level before 3 p.m. CET. There seems to be little chance of a change in the market sentiment and tomorrow’s data could increase the strength of the euro even more - so the dollar could continue to be under pressure. However, there could be an increased level of volatility around the Wednesday publication of FOMC’s last meeting minutes (8 p.m.). The final impact of the aforementioned minutes could be limited, though, taking into account the recent comments from FOMC members.

Zloty still the beneficiary

A positive sentiment on the European market coupled with a weak dollar seems to be the perfect combination for the Polish currency. The zloty remained stable today in relation to most currencies which means that last week’s significant gains were kept. A globally weaker US currency caused the USD/PLN to fall as low as 3.72.

A fall below the 3.70 level could mean the cheapest dollar since October 2015. The current market sentiment doesn’t suggest that the USD/PLN correct its recent drops in the next few days. Such a scenario could be possible should the global sentiment significantly deteriorate and cause a fall in global equity markets which, in turn, could provoke a capital outflow from emerging markets.

Tomorrow’s preview

Destatis will publish the final data regarding the GDP growth in Q1 at 8 a.m. CET. The market consensus points toward a growth rate similar to the preliminary reading of +1.7% year-over-year (+2.4% unadjusted). Two hours later, the Ifo Institute will publish its Business Climate Index of German companies. It climbed last month to 112.9 points which was the highest level in nearly six years. The median market consensus points to a level 0.2 points higher.

IHS Markit will also report the preliminary PMI indexes for the eurozone, including Germany and France among others. We’ve been observing an upward trend in the case of both the industrial and services sectors which, in turn, were a confirmation of a better condition of the region’s economies. Current market estimates point towards maintaining the aforementioned indexes on their recent high levels, close to those seen last month.

Tomorrow’s data could confirm both a better condition and positive sentiment in the euro area which could additionally support the euro. This could also be a positive signal for the zloty because that could suggest a continuation of the positive sentiment toward emerging-market currencies.