Sentiment improves after a disastrous day. Data from the UK's Office of National Statistics indicate a markedly deeper recession in the economy in April than expected. Nevertheless, the pound remains relatively stable, and the GBP/PLN exchange rate is still below 5 PLN.
The worst day since March
Yesterday we observed a significant deterioration in market sentiment. The main market indexes recorded the strongest declines since March (about 5-7% on Wall Street), and the dollar gained from the sale of more risky asset classes. There was not a single factor that triggered this change in sentiment yesterday.
It was more of a combination of factors, and an important part of it could have been Tuesday's message from the Federal Reserve after the monthly meeting. On the one hand, it can be considered very dovish - an increase in interest rates is unlikely to be expected by the end of 2022, but the gloomy picture of the economy in recession may have scared investors slightly.
The Fed in its projections for 2021 and 2022 published together with the statement has forecasted the GDP growth of 5 and 3.5% respectively, and this year a decline of 6.5% is expected. This is far from the 2% growth forecast in December, even before the pandemic.
The growing concern about the impact of the second wave of the disease on the economy may also have contributed to yesterday's deterioration of sentiment. On Tuesday, the Organisation for Economic Cooperation and Development (OECD) gave a 50% chance for the second wave of the pandemic (with a very strong impact on the economy), and in the last dozen or so hours, information has also been coming in from Houston about a possible reissue of a recommendation to stay at home due to the increasing number of cases after lifting the restrictions.
The US Treasury Secretary Steven Mnuchin tried to cool down these emotions and the possibility of a second economic closure yesterday, saying, among other things, that the US economy cannot be closed for a second time. For the market, this negative flow of information from recent days may have been an opportunity to review after a few weeks' waves of optimism.
And for the time being, this is how it should be treated, and although the one-day changes were significant, fundamentally little has changed. Although the dollar was appreciating with negative sentiment, and the EUR/USD quotations during the session in Asia fell below 1.13, the start of the session on European markets wiped out part of the profits of the US currency.
Along with about 2% increases in the main market indexes, the EUR/USD quotations increased to about 1.1340 before midday. And although the relative weakness can be seen in relation to the previous two days' quotations (about 1.14), these levels still underline the weakness of the dollar, which was even valued below 1.09 EUR just three weeks ago.
The dreadful state of the UK's economy
The market is currently focused mainly on the recovery and return to pre-pandemic conditions, i.e. more on the future than current developments. However, the incoming macro data still show how rapidly economies have fallen into a deep recession, which in most cases turned out to be deeper than expected.
It was no different today with the macro data from the Office for National Statistics (ONS) relating to the British economy in April, probably the worst month of the pandemic so far. The UK's GDP shrank by as much as 20.4% on a monthly basis alone, deeper than the 18.7% expected. Year-on-year contraction was 24.5%. The decline was also clearly deeper than expected in the industrial sector, where production fell by 20.3% on a monthly basis and 24.4% on a yearly basis. The decrease was expected to be lower by 5 percentage points in both cases.
The real collapse, however, took place in April in the UK construction sector, which fell by 40.1% per month and 44% per year, and it was expected to fall by around -25 and -31.3% respectively. The pound took the news quite calmly, and today the British currency is supported by an injection of optimism in the broader market and no demand pressure on the dollar. However, the British economy is among those most affected by the pandemic. And if we add to this the negotiation of a new trade agreement with the EU (the old one expires at the end of the year), the pound may become increasingly weaker in the second part of the year.
Today, relative calm and improved sentiment have contributed to limited changes in the valuation of the pound to the zloty, even though data from the British economy are disastrous. The GBP/PLN quotations still remain just below the 5.00 boundary (today around 4.95-4.98). The zloty basket itself has benefited from today's improved sentiment. There are no significant changes - the EUR/PLN exchange rate went back from nearly 4.48 to approx. 4.45, and the USD/PLN continues to move between approx. 4.93-4.94.