The dollar appreciates (Afternoon analysis 27.03.2018)

Strong fluctuations in the dollar accompanied by good market sentiment. It supports the zloty, although the scale of changes is limited.

EUR/USD below 1.24 again

Today, the market was dominated by positive sentiment connected to the decrease in fears of a customs war between the USA and China. The main European market indexes were clearly appreciating (about 1.5%). Similarly, the contracts for the main US indexes had a positive opening.

However, the dollar was characterised by a larger range of fluctuations today. Recently, along with the good sentiment, the US currency has most often lost value in the market, while capital has moved to more risky asset classes. In the morning, the main currency pair, (EUR/USD), reached its highs (around 1.248) since mid-February. However, after reaching it, a rebound to the level of approx. 1.238 took place. As a result, around 3.00 p.m., the dollar gained nearly 0.5% to the euro.

The rapid dollar appreciation also caused an increase in its price expressed in the zloty. While at 10.00 a.m. it was still 3.38 PLN, four hours later the dollar cost 0.03 PLN more. However, the US currency quotations, both in relation to the euro and the zloty, did not differ significantly from the values we observed in previous days. Excluding the USD/PLN losses, the zloty gained in relation to the main currencies today, although the scale of profits was limited (EUR/PLN was still just below 4.22 PLN).

As a result of fluctuations in market sentiment by increasing or decreasing the risk of customs wars, the dollar will also be likely to fluctuate relatively strong. Later in the day, there is also a lack of scheduled macroeconomic publications or events, therefore, the main factor for the dollar or the zloty quotations will be the general sentiment in the global market. The zloty will probably not change significantly today and the zloty's quotations will rather stabilise around current levels.

Tomorrow's preview

The most important publications, which may have an impact on the currency market, will come from the US tomorrow. At 2:30 p.m., the Bureau for Economic Analysis (BEA) will publish data on the economic growth pace in the USA in Q4. It will be the final (third) reading of this index. The market consensus assumes a reading of 2.7% (vs. 2.5% at the second reading).

The BEA will also publish February's data on foreign trade in goods at the same time. In January, the deficit amounted to 74.4 billion USD and was the fifth consecutive month of its growth. The median of market expectations indicates that in February a level close to that of a month ago will be maintained (deficit: 74.1 billion USD).

Although in theory, a larger deficit should have a negative impact on a country's currency, in the current circumstances, an increase in the deficit could have the opposite effect. A higher than expected deficit (2-3 billion USD higher) may, in the context of planned tariffs, raise concerns about strengthening the protectionism of the US and, as a result, strengthen the US dollar, if deterioration in market sentiment is observed.

Currently, fears of a customs war have been somewhat subdued, so the impact of this data may be limited. Also in the case of GDP growth, the probability that the third reading will deviate significantly from the previous values (and the market consensus) is limited. Therefore, their final impact on the dollar is unlikely to be substantial, although an increase in fluctuations around publication time can be observed.