Sentiment improvement (Daily analysis 06.03.2018)

Positive sentiment is observed after appreciations in the US market, decreased fears of Italy and the calming of moods related to customs duties on industrial metals. Really low inflation in Switzerland. The zloty benefits to a limited extent from good sentiment due to fears of a dovish statement from the MPC.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• A lack of macro data may noticeably impact the analyzed currency pairs.

Sentiment more favourable

Yesterday afternoon a clear improvement in global sentiment was observed in the market. Indexes in the USA increased by more than 1%. It is likely this was due to the decrease in pressure evoked by the hypothetical introduction of tariffs on steel and aluminium by the USA.

One of the leading representatives of the Republican party, Paul Ryan expressed his concerns in the context of foreign trade restrictions. He stated that Republicans are very concerned about the consequences of the trade war and will encourage the White House to not follow this plan. Moreover, in the statement published by Ryan's assistant, he said that tax reforms support the economy and it is clear that they do not want to put these increases in growth at risk.

Opposition to President Trump's plans appeared not only among Republicans but also among the associates of the White House. The White House's economic advisor, Gary Cohn will organise a meeting with business representatives and the President to convince Trump that implementation of the tariffs may have really negative effects. Therefore, perhaps the trade war issue may become distant, or at least the fear of its extension beyond industrial metals is smaller than it was over the weekend.

There are still incomplete results of the Italian elections. Apart from the coalition idea of combining the Democratic Party and the Five Star Movement (rather unlikely), there was no other news from Italy. The overall positive external market sentiment translated into a return on Italy's bonds maturing in 10-years below the 2.0% boundary, meaning the increases from Monday have vanished. Therefore, the issue of Italy will probably be ignored by investors, if the fear of a populist coalition does not increase significantly.

Low inflation in Switzerland

The Swiss Federal Statistical Office (FSO) published data on inflation in the morning. Consumer price increases remain very moderate. February's CPI amounted to 0.6% year-on-year. Moreover, the pressure of core inflation (excluding fresh and seasonal products and fuels) is also very limited and amounts to 0.5% year-on-year.

The Swiss currency in relation to the euro weakened strongly yesterday. The EUR/CHF pair exceeded the 1.1600 level, which is the highest level for less than a month. The appreciations are probably caused by a moderate response to the Italian elections and improved global sentiment. However, low inflation and limited concern about the negative consequences of political issues in Italy is good news for those who are repaying loans in the franc.

Zloty under pressure of Polish MPC

Although good sentiment was observed in the market, the zloty did not appreciate in relation to the euro and lost around 0.2% in relation to the forint during the first trading hours in Europe. This may be caused by fears of some investors that tomorrow's MPC meeting will be dovish and the NBP macroeconomic projections will show a flatter inflation path than in November.

Lower inflationary pressure may be a good argument for the MPC to prolong the possibility of no changes in the interest rate for the first months of 2019. Currently, the market assumes approximately one increase by 0.25 percentage points over the next year. Perhaps these expectations can be reduced, which means a negative impact on the zloty. Moreover, despite good sentiment, growth potential for the zloty may be limited.