The dollar and the pound depreciate (Daily analysis 27.02.2020)

US Treasury bond yields are falling to historically low levels. As a result, the dollar depreciates. The UK can start preparing for a hard Brexit in June. The zloty is gaining despite a deterioration in sentiment.

The EUR/USD pair appreciates 1.10 level

The improvement in sentiment observed yesterday afternoon didn't last very long. The main market indexes in the USA (except Nasdaq) closed with falls. Declines continued during the first hours of trading on the European markets. By midday, the main European market indexes were losing more than 2 percent, and capital flows to the bond market continued. As a result, the yields of 10- and 30-year Treasury bonds fell to the lowest levels in history - 1.2888% and 1.7766% respectively. In addition, the yields of bonds maturing in 2-year fell below 1.11% for the first time since August 2016.

The strong fall in the cost of debt in the US meant a new wave of dollar weakness. The main currency pair, i.e. the euro/dollar, increased around midday to nearly 1.0950. This is the highest EUR/USD exchange rate since February 10th. Despite strong declines in the equity market and a global worsening of sentiment, this weakness of the dollar has today contributed to a slightly better condition of the zloty. The USD/PLN exchange rate fell to about 3.93, which is the lowest level in a week and a half. Also, after reaching nearly 4.32 in the morning, the EUR/PLN exchange rate dropped to about 4.3050.

The British are determined to keep the negotiations with the EU under control

An even stronger decline was observed in the case of the GBP/PLN pair, which around midday was already 1% below yesterday's closing level and the lowest since February 12th (around 5.06). Apart from the better condition of the zloty, the pound was also weakened by reports from the UK on the negotiations of a new trade agreement with the EU. Today, the UK government published a negotiating mandate with the EU to start preparations for a trade without an agreement if the agreement is not clear by June. The UK government is also showing its willingness to trade without an agreement if the negotiations fail and according to the negotiating mandate published today, the British people do not intend to extend the transitional period beyond the end of December this year.

The spectre of hard Brexit has strongly depreciated the pound. Negotiating a trade agreement will not be easier than the Brexit agreement itself, and it took three years to develop the former. In this context, even a whole year to reach a full trade agreement seemed to be insufficient. The date set in June may suggest a more confrontational nature of the negotiations with the EU, which may have a negative impact on the pound. Today, the pound has been the cheapest in relation to the euro for just over three weeks, while its value in relation to the dollar reached around 1.2860 USD. Although it was the lowest in just a week, the GBP/USD has been rapidly approaching its bottom quotations' line since mid-October last year (around 1.2770). The information published today by the British government increases uncertainty in the market and may put supply pressure on the British currency in the coming months.

Zloty supported by dollar's depreciation

Current zloty's changes on the market, apart from the origins of the coronavirus influence, are connected with changes in the profitability of US Treasury bonds and the dollar. The Federal Reserve is one of the few largest central banks in the world, which still has relatively large space for interest rate cuts. This is what the market is currently expecting, and this factor supports the zloty. Further profitability drops in the US resulting in a fall in the dollar may help the zloty despite negative sentiment in the broader market. However, if this pressure on dollar sell-off is reversed, the zloty may lose significantly again.