Exchange rates overshadowed by panic in the stock market; dollar gains again (Daily analysis 19.05.2022)

The sentiment on world markets is highly unstable. The dynamic rebound on Wall Street and other stock markets had a fragile foundation and turned into a panic sell-off in the blink of an eye. US stock indexes even had their worst session in almost two years and the first wave of the pandemic. In such an environment, investors once again think more fondly of the dollar and turn away from currencies considered to be risky. Scandinavian currencies and the pound, among others, are becoming cheaper, and the Polish zloty may be pushed off its upward path.

The catalyst for the several percent falls in the main Wall Street indexes are the disappointing results of the US retail giants. They are fuelling fears about the strength of consumption and, more broadly, the prospects for economic growth. There are also worrying reports of monkeypox outbreaks in the UK, Spain, Portugal, Canada and the US. The disease has so far been sporadic, mainly in West Africa. Global economies have not yet recovered from the effects of the COVID-19 pandemic, so such headlines catch the attention of investors, especially in moments of stock market panic.

At present, currency quotations are dictated by the sentiment on stock exchanges. Since the beginning of the quarter, the S&P500 index has fallen by more than a dozen percent, and the Nasdaq index of technology companies has plunged by 20 percent. This trend has developed along with the dollar's strengthening, the main driver of both trends being the fear of a sharp Fed rate hike. Yesterday's declines on Wall Street were powerful but took place after a solid rebound. The main stock market averages were not pushed to new lows. Further attempts to buy overvalued shares cannot be ruled out. There is a continuing attempt to establish a bottom after a very sharp discount, becoming very violent and abrupt.

On a similar note: the EUR/USD retreated under 1.05 but, as a result, did not erase even half of the rebound of the previous few days. Thursday morning's quotations are more than 1% above last week's low of 1.0350, a ceiling that corresponds to the 2017 lows. In this light, the path to parity between the euro and the dollar remains closed. We believe that the Fed will not raise interest rates by more than 50 basis points at a time and that signals are starting to come in bolder from the European Central Bank that a hike cycle will be inaugurated in July. This combination may not be enough to lift the EUR/USD strongly, but it should be enough to stem the dollar's rally. Speaking of the ECB and the future of its policy, let's add that today at 1:30 pm (CET), we will know the minutes of the April meeting, and in the afternoon, several policymakers are scheduled to make public speeches.