Dollar up, zloty down (Daily analysis 01.03.2018)

The market maintains its weak sentiment and together with the dollar's appreciation and some worse than expected data from the Polish industrial sector, the zloty is under pressure. Market attention is focused on the inflation readings in the USA and the speech of the Federal Reserve's president.

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

• 2:30 p.m.: January's core inflation in the USA (estimates: 1.5% YOY; previously 1.5% YOY),
• 4:00 p.m.: Jerome Powell's speech to the US Congress.

A sell off of shares deteriorates market sentiment

The downward trend of main market indexes were observed during yesterday's US session when they lost approximately 1.5%. Moreover, a weekly report from the local fuel market showed a higher than expected increase in oil and product stocks, depreciating the barrel of crude oil by about 2 USD. The relatively strong dollar (the EUR/USD pair below 1.22) only worsened the market's sentiment. Additionally, European indexes lost 1% in the morning.

The zloty usually depreciates while risk aversion increases and a demand for more risky assets decreases. Today's day also proved this theory, and the worse than expected data in February on the Polish industrial sector's PMI caused the zloty to deteriorate. It fell to 53.7 points, the lowest level since October, with market expectations at 0.4 points higher.

Although the overall sector's description was rather optimistic (an upward trend 41 months in a row, which is the longest span since the middle of 1998), the growth pace slowed down for the second consecutive month translating the slower growth pace in the number of new orders, production and employment and a decrease in production stocks.

This translated into the weakening of the entire zloty basket as the euro cost around 4.19 PLN, the highest level in a week. Yesterday, it was 0.02 PLN cheaper around midday. In turn, the dollar appreciated, leveling at 3.44, which is the highest valuation in three weeks. However, it is 0.08 PLN short of this year's highs.

The zloty's quotations will depend on the market's sentiment which was observed in the later hours. Sentiment improvement will support the zloty and it may pare some losses. However, it may be disturbed by two events. At 2:30 p.m., PCE inflation data in the US will be published (this inflation is taken into account by the Fed in its projections). A crucial reading will include the core index (excluding energy and food prices) as its growth above 1.5% year-on-year may accelerate the dollar's appreciation and maintain a weak sentiment in the market.

The weak sentiment is also a result of expectations for the next speech by Jerome Powell, the new President of the Federal Reserve, before the US Congress. Recently, his speech caused a depreciation on the share and bond market, which ultimately strengthened the dollar. Market participants may be afraid that this scenario will repeat. Therefore, an increase in the fluctuation level in the broad market is expected around 4.00 p.m. (start of the speech).