Economic confidence in Germany recorded a sharp jump (Afternoon analysis 19.05.2020)

Weaker dollar, stronger zloty: positive sentiment continues. The index of economic confidence in Germany increased in May to its highest level since 2015. That is just two months after it fell to its lowest level since 2011.

The Polish currency appreciates, but changes are still limited

The positive sentiment in the broader market continued to keep the supply pressure on the dollar in the afternoon. The main currency pair, i.e. the EUR/USD, rose to about 1.09765 today, the highest level in just over two weeks. The combination of an increase in risk appetite with a weaker dollar is usually a signal for the zloty to appreciate. And it was no different today.

The zloty strengthened in relation to many of the basic currencies. In the afternoon, the USD/PLN exchange rate fell even below 4.15 (close to the lowest point since mid-April) and the EUR/PLN rate fell slightly below 4.55 (the lowest level in a week). However, basically, not much has changed in the market. The current optimism arises from the hopes of lifting the restrictions and reports on vaccines. If we look at the last two months, the zloty's quotations against the main currencies are practically closed in a limited range of fluctuations from the end of March.

Germany expects to accelerate in the last quarter

What is happening on the market and what kind of sentiment prevails are accurately reflected in the economic sentiment index published today by ZEW (for May) - an important barometer for the market, among others for the German economy. The evaluation of the current state of the German economy dropped even more in comparison to April to -93.5 pts., which is the lowest level in the history of the survey and 7 pts. lower than expected. However, the confidence index clearly rose to 51 pts. and by as much as 21 pts. above the expected reading. How the market sentiment has changed dramatically is illustrated by the fact that the confidence index rose from its lowest level since 2011 (in March) to the highest level since 2015 in two months.

The commentary to the ZEW report states, "optimism is growing that there will be an economic turnaround from summer onwards. This is also reflected in the significant improvement in expectations for individual sectors. According to the financial-market experts surveyed, economic growth is expected to pick up pace again in the fourth quarter of 2020". This does not mean, however, that the recovery will be rapid. ZEW currently estimates that the 2019 GDP level will only be reached in 2022.

We know what Powell will tell the Senate Banking Committee

This is quite in line with what Jerome Powell, head of the Federal Reserve (Fed), said in a recent interview with CNBC: that US GDP may return to pre-pandemic levels in late 2021. However, it should be noted that every macroeconomic projection is burdened with a great deal of uncertainty. That is why the Fed has not published its projections, and usually, it does.

The aforementioned Powell, together with, among others, Secretary of the Treasury Steven Mnuchin, addressed the Senate Banking Committee today (at 4 p.m.) on the pandemic stimulus package. The content of Powell's statement was already known, so fundamental changes are unlikely to occur. The market can expect some degree of stimulation, so any comments suggesting an increase in the stimulation may improve current market sentiment.