The spiral of fear about the consequences of the Federal Reserve's tightening of monetary policy is well under way. Equity markets are now in the red for longer, and Friday's session on Wall Street was the worst in over a decade. In such conditions, the dollar holds the cards, and the outcome of the French elections and Emmanuel Macron's victory may not become the main theme of trading, neither on the currency market nor on trading floors.
Polish zloty: the euro exchange rate rises, the dollar is not strong
On paper, the positive developments on the French political scene cannot improve the euro's perception and have been pushed to the background. The common currency only gained against the dollar at the start of the market week. On Monday morning, the euro is once again slipping below the dollar and eight cents. As a result, the EUR/USD is trading at its lowest since the pandemic market crash of March 2020. This lifts the USD/PLN to 4.33, its highest in a month. Despite the depreciation, both in the Asian session and in the whole of last week, the euro proved to be one of the most resilient currencies to the strength of the dollar. The pound, the Norwegian krone and the Swiss franc, among others, are performing much worse.
This week brings data on inflation in Poland and the eurozone - these should confirm new records of price pressure. US GDP growth in the first quarter will also be published. This information should not be able to affect the way the individual central banks perceive their intentions. It looks like the correction on the equity markets is starting to "take on a life of its own", and the dollar's momentum can already be compared to a snowball.
Despite a massive cooling of investment sentiment and a clear rebound, the EUR/PLN exchange rate is still within its early-April range. If the EUR/PLN exchange rate breaks through the 4.67-4.68 level, this could bring it back above 4.70. This is not our baseline scenario, but with each day of a sell-off on equity markets and strengthening the US currency, the zloty will become more and more vulnerable. Resistance to turbulence should be provided by the prospect of another sharp rate hike. Conotoxia forecasts that the Polish MPC will repeat the 100bp move at its meeting on May 4. Negotiations on the unblocking of the National Recovery Plan are also nearing completion.
Euro: Macron's win won't change the trend this time
In Sunday's vote, Emmanuel Macron secured another five years in office at the Elysée Palace - the status quo is maintained. The French people's choice means a less expansive budgetary policy than that proposed by Marine Le Pen, whose electoral programme includes tax cuts and lowering the retirement age at the same time. The postulates of the opponents to the office of the French president differed the most, of course, in their approach to European integration. Macron is a strong advocate of European integration, while Le Pen has been building her popularity on nationalist, anti-European slogans for years.
In 2017, the first positive reaction to the vote was much stronger. It was even a market trend-changing event. This time it doesn't seem to be the case. Macron's lead in the polls in the last straight of the campaign was solid and stable. On average, they indicated support higher by almost 10 percentage points. According to commentators and the public, the president seeking re-election also performed more convincingly in the televised debate. With the previous presidential election, investors had fresh memories of the shocking outcome of 2016: the Brexit referendum and Donald Trump's triumph over Hillary Clinton. In 2017, a Le Pen win would top up those results.
While in 2017, the markets were animated by settlements on the political scene, today, the tone is set by politics, but monetary politics. The hierarchy in the foreign exchange market is determined by the propensity of the various monetary authorities to abandon the tools that were resorted to during the pandemic and raise interest rates. In this field, the dollar is the favourite of the financial markets, with the euro in the tail. The first rate hike did not take place until March, and today there is speculation that at the end of the half-year, rates will be as much as 150 bp higher than at the beginning of the year. The balance sheet is also to be reduced very aggressively, swelling from around 4 to 9 trillion dollars in two years. The European Central Bank will need to abandon its conservative, timid stance to break out of the trend of weakness against the dollar. We expect this to happen with the next round of forecasts, which will determine the September rate hike.