Euro the most expensive in over a month (Afternoon analysis 23.04.2018)

A stronger dollar, combined with growing yields of Treasury bonds, clearly weakens the zloty. The zloty's condition may deteriorate even further on Thursday.

Dollar above in green, zloty below in red

Today, a strengthening of the dollar was observed, which was also confirmed by the growing yields of US Treasury bonds. There was also a rising gap between them and European counterparts, such as the German Bund. This is a consequence of lower expectations for monetary tightening in the euro area and a simultaneous tightening (increase in interest rates) in the USA.

The main currency pair quotations fell to about 1.223 this afternoon. Although this is within the relatively narrow fluctuation range between the euro and the dollar (EUR/USD), it is already close to its lower limit. A dovish message from the European Central Bank (ECB) on Thursday could further weaken the euro and cause an upward trend on the dollar.

A stronger dollar connected with the possibility of rising interest rates is currently bad news for the zloty. In Poland, just like in the euro area, a monetary tightening is not expected in the nearest future, or perhaps it will not even be seen in 2019. This puts pressure on the zloty. The pressure is also increased by the growing yields of the US Treasury bonds, which are becoming an increasingly attractive option for capital.

The zloty's weakness was visible not only in relation to the main currencies but also to the local Hungarian forint. Today, the euro exchange rate rose to about 4.195 PLN, the most for over a month, while the globally stronger franc caused that the price of one franc exceeded even 3.51 PLN, the most for a week (on Friday morning a price lower by over 0.04 PLN was observed).

The dollar was the most expensive since 6 April and exceeded 3.43 PLN before 1.00 p.m., although its exchange rate decreased to 3.42 PLN before 3.00 p.m. Further dollar appreciation may result in the weakening of the zloty, which may respond to increases in recent months. Thursday's ECB press conference and the statement could be crucial. The marked weakening of the euro and the following strengthening of the dollar may cause an increase in supply pressure on the zloty.

Tomorrow's preview

The calendar of scheduled macroeconomic publications and events is limited tomorrow. Therefore, significant changes in the basic currencies' quotations, including the zloty, should not be expected.

At 10:00 a.m., Ifo will publish April's German Business Sentiment Indicator. With its historic high in January (117.6 points), the sentiment among German companies weakened in the next two months. The market consensus shows a significant decrease to 102.8 points. Such a sharp decrease, however, is largely caused by the change in the methodology of calculating the index, which will also include the services sector as of this month. March's level, recalculated according to the new method, now equals 103.2 points (previously 114.7 points), while the median of market expectations, in theory, does not assume such a significant decrease.

Probably, this index will decrease, even below the consensus, mainly due to fears about restrictions on global trade (to be more specific tariffs on aluminium and steel, among others). Import from the European Union is currently excluded from these duties, but they remain so until May 1st. No agreement has been reached between the two parties on further exclusion from the duties imposed yet, therefore the chances of a positive surprise from the Ifo Index are limited.

Although this is rather secondary data in terms of its impact on the euro, it may slightly increase the current pressure on the euro and also worsen sentiment in the equity market. The pressure on the euro is related to the decreasing probability of monetary tightening (as well as its signalling) by the European Central Bank, in line with market expectations.