The sentiment on global equity markets continues to move like a flag in the wind. Fears about the prospects for the main economies continue to spread. Despite this, the second half of May belonged to the Polish zloty. The euro exchange rate rose only one day in this period and is currently above 4.60 against the zloty.
The Polish zloty: EUR/PLN downward revisions may be (temporarily) put on hold
Data from Poland show that growth remained strong at the start of the quarter, and the situation on the labour market will force the Monetary Policy Council to raise rates sharply. It is also a matter of days before the European Commission unblocks financing for the National Recovery Plan. Therefore, local factors are favourable for the zloty, but the key to its strengthening is the weakening of expectations that the Fed will be able to fight inflation extremely aggressively. In recent days, the pillars of the spring trend of the dollar strengthening, which pushed capital away from emerging markets, have been shaken.
Although, in our opinion, the outlook for the zloty is positive (Conotoxia forecasts invariably assume that the EUR/PLN will fall to 4.50 in the coming weeks), we have doubts that the breach of 4.60 is the announcement of the next stage of a significant strengthening of the zloty. We note that there is a high risk that the EUR/PLN exchange rate will remain at this barrier for some time, given the turmoil on global markets. This does not change the fact that only a return of quotations above 4.64 would push the EUR/PLN pair off the downward path.
The US dollar: further EUR/USD growth may face resistance
Last week a few factors were in the limelight. Mainly concerns that the US economy is suddenly and sharply slowing down and that consumption is starting to lose steam under the influence of high inflation, and the strong start of the Fed's policy tightening series. Such assessments were driven by the financial results of the tycoons of the American retail trade (Walmart and Target chains) and the regional economic sentiment indexes in the Philadelphia and New York areas, which began a monthly series of data releases. Moreover, the trend of an increasing number of new jobless claims extended to six weeks.
Fears of a stagflationary scenario are not fading this week either. On the contrary, they are fuelled by a fall in the PMI index for services and a sharp bump in the number of houses sold on the primary market. Later in the week, the market will look for clues in Wall Street companies' next readings and quarterly reports. On the other hand, tonight's publication of the minutes of the previous Fed meeting should pass without much notice. We assume that rates will not be raised by more than 50 basis points at one time, which should help slow down the stronger dollar trend.
Nevertheless, we believe that the USD weakness from last week may have come too early and may not be continued. After all, the most important data for April (retail sales, employment change) came out decent. If the labour market remains strong, the recent wave of fears and doubts about the Fed's intentions could subside instantly. Tomorrow's weekly statistics on the number of new jobless claims will arouse greater interest than usual. The key report will be the May labour market report, which will be released on Friday, 3 June at 2:30 p.m. CET. Further EUR/USD gains may also be hindered by doubts about the European Central Bank's intentions. The announcement of two hikes in Q3 has already been digested, and usual reassurance is starting to come from the Governing Council that the tightening will be gradual.
The pound: ambiguous economic picture hurts GBP
The Bank of England authorities surprised at their last meeting with its openness, stating a pessimistic picture of the outlook for the British economy. This is crucial as the hierarchy among the main currencies at the moment is determined by how hard the central bank will fight to raise rates and combat record inflation. In this area, perceptions of the UK monetary authorities' intentions have changed by 180 degrees in recent months. Although the tightening cycle started early, at the moment, its target level and especially the number of rate rises remaining to its end is not impressive.
Consequently, the pound became a victim of very high expectations and was pushed to the tail of the currency stakes. This year, the Japanese yen, Swedish krona, and Norwegian krone are the weakest G10 currencies. Coming back to the Bank of England and its policy: investors have assumed that, in the current position, the scale of hikes will be determined by signals from the economy. If the black scenarios of the central bank do not come true, there will be space for bolder increases. The problem is that the series of readings over the past week do not paint a clear picture of the economy's condition, which translates into frequent fluctuations of the pound against the euro and the dollar.
In April, inflation dynamics reached 9.0% year-on-year but accelerated marginally weaker than expected. The labour market remains hot and retail sales unambiguously surprised positively. In sport, it is often said that you are only as good as your last game. The last bit of information, yesterday's PMI index readings, which are designed to foretell economic fluctuations in advance, came out pale and pushed the pound into bearish territory.
A moderate respite for the pound may also be provided by an improvement in global market sentiment and a sustained turnaround in stock indexes, as GBP is one of the most sensitive currencies to sentiment fluctuations. A reliable series of data showing the resilience of consumption will be needed for a sustained improvement of its condition.