Dominance of positive sentiment (Daily analysis 18.05.2020)

The positive sentiment associated with lifting the restrictions and restarting the economies overflows the markets. The dollar is declining slightly, but changes are still minimal. The zloty remains stable within a limited fluctuation range. The end of the week may bring more indications on the recovery path.

Markets under a wave of optimism

The week started with relatively positive sentiment. The market does not react too much to the disastrous macroeconomic data from the Q1 or March and April; instead, it focuses on the recovery path. Looking through all asset classes today, this is quite an optimistic path. The main European market indexes gained nearly 4% in the afternoon, oil (WTI) about 10%, and the positive sentiment is highlighted by (mostly) declining yields of Treasury bonds.

Currencies still calm

This positive sentiment also spread to the foreign exchange market. Due to the "risk on" market attitude, the US currency was slightly weaker this afternoon. However, changes among the main currencies, including the dollar, remain limited, underlining the more cautious approach of this market than, for example, the equity market.

The EUR/USD quotations increased this afternoon by approx. 0.2%, but the volatility in recent days is small, ranging between approx. 1.0770-1.0890. For comparison, in March, at the height of the market panic, the EUR/USD exchange rate remained between 1.0620-1.1500.

Forecasts for the zloty

The limited volatility of the dollar also helps to stabilise the zloty. Today's USD/PLN quotations were in the range of 4.20-4.22, and EUR/PLN fluctuated around 4.56, falling within the volatility range of the previous days. In a slightly longer perspective (next year), an increase in global economic activity will most likely support the return of the zloty to pre-pandemic levels.

Although, in the perspective of the coming weeks, we can still observe its weakening, if the currently prevailing positive sentiment on the market deteriorates slightly. A very rapid return of the economies to the pre-pandemic starting point is unlikely - a gradual and uneven path seems to be much more likely, depending on the country and industry. Ultimately, this may worsen the sentiment somewhat in the coming weeks, when macro data may suggest this uneven path to GDP levels before the pandemic.

This week's preview

This week, we are about to learn some of the first data that may show, to some extent, the impact of the restrictions being lifted. On Thursday and Friday, preliminary PMI data from the UK and the US, as well as from the Eurozone, will be published. They may give some indication as to how the recovery path may look in this first period of the easing of restrictions and restarting the economies. Therefore, an increase in market volatility at the end of the week may be expected.