Exchange rates cross the line, the euro at its highest in two months; the dollar rebounds from bottom (Daily 19.01.2023)

The market idyll was brutally interrupted by disastrous US economic data, causing investors' panic. Apparent symptoms of cooling investment sentiment are pulling the zloty out of its lethargy. The EUR/USD exchange rate was temporarily pushed below 1.08.

The US dollar: data so bad that they support the USD

At the beginning of the year, investors were keen to believe in the scenario of a so-called soft landing, i.e. the global economy avoiding a long and sustained recession. Market sentiment was supported by encouraging news from the eurozone, where the energy crisis - the biggest risk to growth - is being avoided thanks to the bump in gas prices. At the same time, the weakening of the US economy, at a controlled pace and with further signs of fading inflation, allowed for confidence that the US Federal Reserve would not raise interest rates too aggressively and would proceed to cut them by the end of the year.

The recent recessionary signals from the US economy may herald that optimism will cool in a flash and that the growth plunge will be too deep to boldly channel capital into risky markets and the world of emerging markets. First, the leading barometer of US services sentiment, whose collapse is considered a credible forerunner of recession, dived into in the first part of January. Yesterday, retail sales information was terribly disappointing. And not only in the past month, but the figures for November were also revised very sharply downwards. The index excluding cars and fuel fell by 0.7% m/m, following a 0.5% decline the month before. Industrial production, which contracted for the third consecutive month, also came out pale. Despite lowering expectations, data from the US disappointed by the most in months.

Euro: the EUR/USD and the EUR/CHF at risk of a weakening economy

With this, the line has been crossed, after which worrying news from the US economy may no longer hit the dollar. The threat of a deep recession will create turbulence in the markets and push investors towards defensive currencies. The franc and the dollar invariably play the role of safe havens. After a period of undisputed dominance for most of 2022, the USD and CHF have been severely overvalued in the past several weeks, making them attractive again as black clouds begin to gather over the global economy.

The euro will be weaker than the dollar in a black scenario for global growth, not only because of the recent rally. It is a currency whose strength is more clearly dependent on the global economic situation. The current valuation of the European Central Bank's intentions is relatively elevated and could be a ballast if the monetary authorities are unable to implement increases on the scale announced and push the deposit rate clearly above 3%.

Polish zloty: declining EUR/PLN forecasts move away

The latest developments are in line with Conotoxia's currency forecasts, which assume that the first quarter will not bring a deepening of declines in the zloty currency pairs and may be marked by a rebound of the heavily depreciated dollar over the past weeks.

We continue to assume that at the end of March, the EUR/PLN exchange rate will be around 4.70. The dollar exchange rate will likely rebound towards 4.50 PLN as the EUR/USD slides to 1.05. The single currency, which recently had its five minutes, is likely to outperform the franc only temporarily after a six-month break. The zloty should only gain more strongly once the peak in domestic inflation has passed and the global economy has bottomed out. Only in such conditions, and probably in the second part of the year, will the euro exchange rate be able to head below 4.50 PLN and the dollar towards the 4 PLN barrier.