Currency rates once again influenced by pandemic fears (Daily analysis 20.07.2021)

The week kicks off with a flight from risky currencies and assets. This setup clearly supports the dollar, but the EUR/USD pair struggles to stay in the 1.18 boundary.

Uncertainty and concerns about the sustainability of economic growth dominated global markets in July. These are fuelled by the spread of the delta variant of the coronavirus, which could mean the return of restrictions and movement limitations. On Monday, there was the worst session on Wall Street in months, and oil (also due to the OPEC+ agreement increasing production) collapsed 10% from the highs at the beginning of the month. In such a hostile environment, emerging market currencies, Scandies and commodity blocks are losing ground. The deepening risk aversion means that currencies that previously held their own strength are now losing favour. These include the pound and the Czech koruna. Bitcoin is also being hit hard by the increased aversion to risky assets and is trading below 30,000 USD.

The highlight of the week will be the European Central Bank meeting. The terms of asset purchases will probably not be adjusted until September or even December. The modifications to the communication announced by President Christine Lagarde will be related to changes in the ECB's strategy and its focus on a symmetrical 2% inflation target. This means that the single currency cannot expect support from the ECB's policy, which is heading in an increasingly soft, dovish direction. Friday's publications of PMI indexes, the leading barometers of the economic situation, will also be important.

Polish zloty remains insensitive to positive outlook confirmation

The zloty remains indifferent to strong economic news and remains influenced by global trends. The MPC's reluctance to tighten monetary policy plays a major role in this. Clearly, the risks lie in further increases in the EUR/USD and franc exchange rates, but so far, the EUR/PLN barrier of 4.60 has not been breached (which would open the way for the EUR/PLN exchange rate to rise from PLN 4.62). Similarly, the EUR/USD pair has been trading near the 1.18 area for several days now but has not yet managed to break through this barrier on a sustained basis. As a result, the USD/PLN pair is struggling to stay below 3.90. June industrial production was 18.4% higher than a year ago. The sector is benefiting from strong demand and has so far not experienced problems with access to components for production. However, supply problems are strongly visible in producer inflation, which, also excluding prices of unprocessed commodities, is rising at the fastest rate in a decade.

Data from industry reinforce forecasts that GDP growth exceeded 10% y/y in Q2. For the year as a whole, the growth rate should exceed 5%, and this result is likely to be repeated in 2022. The sector is red-hot and has already recovered from the pandemic many months ago. Tomorrow's retail sales data could be much more interesting. A sign of the continued strength of consumer demand in the coming quarters is Monday's optimistic labour market data: both employment and wages are growing faster than forecast.