Daily analysis 25.01.2018

The US Treasury Secretary confirms his comments on the dollar in other sources. The ECB's meeting stays as an important event but may be less crucial due to the recent behavior of the US currency. The zloty remained relatively stable in relation to the euro. The dollar's quotations fell below 3.35 PLN.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 1:45 p.m.: The decision on interest rates in the eurozone (estimates: unchanged - negative deposit rate minus 0.4%, refinancing 0.00%),
• 2:30 p.m.: Mario Draghi's press conference after the ECB meeting.

Dollar at new lows

Comments by the US Treasury Secretary on the weak dollar being beneficial to the US economy as it improves the external trade balance is still the most important piece of information. Yesterday, it triggered a new depreciation wave of the dollar, pushing the currency index (DXY) to new lows and the value of EUR/USD above the 1.2450 level (highest since November 2014).

It is interesting that Secretary Mnuchin had more comments after his first. In an interview for the Financial Times, he said that his opinion on the weaker dollar being good for the US economy was "a statement of fact". Also during today's panel discussion in Davos, Mnuchin said that his "comments regarding the dollar were quite clear yesterday".

Why did the dollar depreciate? To some extent this is a departure from US policy, due to the fact that for more than 20 years, the policy of a relatively strong currency has been preferred. However, its importance may be relevant since the USD index in 2008 was the weakest in its 50-year history.

As a result, it seems that a negative sentiment towards the USD may be the true explanation. This is probably due to the fact that there is still a strong flow of capital to emerging economies where the global economic recovery creates an opportunity for rate hikes to be seen again. It may be the result of fear regarding a "currency war," where each country tries to use the currency to stimulate its own economy. However, this strategy is completely unnecessary with current rapid global growth. There is also an argument for a more protectionist approach to US trade. However, in addition to the negative economic effects on the world, this would lead to an increase in the dollar's value (customs, duties and reduced imports) rather than a fall for the short term.

EUR/USD at the highest level, but is the euro expensive?

The market's reaction to Mnuchin's comments was definitely more important than today's ECB meeting. Therefore, the market reactions to reports from the European monetary authorities may have a smaller effect on currencies than previously assumed.

The issue of euro valuation will probably dominate Mario Draghi's press conference. However, the question arises regarding the method of the ECB’s interpretation of the euro's behaviour. The EUR/USD has increased by 5% since the ECB’s meeting in mid-December. However, this is mainly the effect of a significant weakening of the dollar on the global market. The euro index calculated by the ECB on the basis of the euro’s valuation against the currency basket of countries participating in trade with the eurozone increased by 1%. If Mario Draghi pays more attention to the index than to the EUR/USD pair, this may mean that the ECB is not so concerned about the euro's behaviour.

The suggestion of a too-early valuation of interest rate increases in the eurozone by the market may have also had an impact on the market. This would be negative information for the euro. On the other hand, the lack of highlighting this fact may show that the ECB is not at all concerned about it. However, it is worthwhile to return to the events of the last hours. It is possible that even if Draghi's message is relatively dovish, it will not cause a stronger fall in the EUR/USD pair due to a negative sentiment towards the dollar.

Dollar under pressure, as well as the zloty

The majority of attention on the domestic market is attracted by the USD/PLN pair. The weak global situation of the dollar causes the zloty to appreciate to values not seen since the end of October 2014 (3.33 PLN). The euro and the Swiss franc remained relatively stable. On the other hand, the pound’s exchange rate increased to 4.77 PLN and is at the highest level in over a month.

It seems that the impact of the ECB meeting on the EUR/PLN exchange rate should be rather limited. However, if the euro weakened and the dollar strengthened, then all main currencies related to the zloty could rise, with the exception of the USD/PLN. This scenario, however, due to the events in the last hours, is much less likely than it was a few days ago. Therefore, fluctuations during the ECB meeting may be considerable but the direction of recent moves does not have to be changed even in the case of the relatively dovish attitude of the ECB.