The EUR/USD pair remained close to the 1.2500 boundary (close to three-year highs). The emerging market's currencies appreciated and the zloty was listed at the forefront of the quotations. The EUR/PLN pair remained close to the 4.15 level.
A day ago, the market seriously wondered how the US investors would react to the higher than expected inflation and weaker retail sales. The initial reaction, which assumed sharp drops at the opening of the US session, was relatively logical. Higher inflation, with tighter monetary policy and weakening economic conditions (low consumer demand), is unlikely to be positive for shares.
Only sentiment matters
However, it soon turned out that unfavourable economic data and depreciation on the US market became an excuse to buy shares in the USA and not to sell them. Moreover, opinions appeared that the weaker retail sales could rather be a one-off event (January may sometimes be disturbed by e.g. weather issues or problems with seasonal adjustment). Also, the risk of a faster inflation growth pace (without overall prices in month-on-month core terms has risen the fastest in more than 10 years) has not caused any long-term concern in the share market, even though the debt instruments market has reacted to it.
Therefore, the sharp improvement of the sentiment was contrary to economic data. Of course, such things can happen, but in the long term, moves against economic readings will be difficult to maintain.
The sentiment's improvement (initiated in the USA) has been translated into the currency market. The dollar weakened and the currencies of the emerging markets clearly appreciated. The zloty was by 2.7% stronger than the dollar in relation to Friday's closing. Only three currencies from 31 developed countries achieved a better result than the zloty. They were the Colombian peso, Russian ruble and South African rand (ZAR was also supported by political events in South Africa).
The movements range was probably large due to the general participants' surprise on the quotation course after data from the USA. Betting against such a strong sentiment return was risky, so the opposite positions were quickly closed, increasing the scale of optimism in EM currencies and pessimism in the dollar.
After yesterday's events, we can draw only one conclusion. The currencies' reaction is almost entirely influenced by the share market. Moreover, US trading is characterized by incredible returns of sentiment. Until the situation calms down and the currencies find references in a given macro or monetary policy perspective, their volatility may remain chaotic.