The dollar is getting stronger, and the markets are breaking records (Afternoon analysis 12.02.2020)

The EUR/USD rate is close to its lowest level in three years. The zloty is protected against the negative impact of a strong dollar by positive sentiment in the market. Tomorrow is the publication of January's data on consumer inflation in the USA.

Demand for equities on European markets

On Wednesday, new records were set in the European equity markets (among the main market indexes), which supports the prevailing positive sentiment. In the afternoon, the dollar gradually began to appreciate, with EUR/USD prices falling slightly below 1.09 after the start of the session on the New York Stock Exchange. Therefore, the main currency pair's exchange rate approached its lowest level since May 2017, i.e. around 1.0880.

The reason for the dollar's appreciation against the euro is that data from the eurozone are weaker than expected, while in the USA the majority of data exceed expectations. Despite strong growth in the equity market, concerns about the impact of the coronavirus on the economy also lead to greater demand for the dollar. The situation indicates that the trend for a strong US currency remains, even though there is a lack of hawkish moves from the Federal Reserve (Fed).

The Chairman of the Federal Reserve does not announce changes

Jerome Powell, Fed's Chairman, spoke in the US Congress today. Like yesterday, he said nothing to surprise the market. Before the outbreak of the epidemic, the expectations of the Fed itself indicated no change in interest rates until the end of the year. It is too early to assess the impact of the virus on the global economy, so a change in the Fed's monetary policy is not expected now.

For the zloty, Wednesday turned out to be relatively calm. There are two forces acting on the Polish currency, which are now somehow cancelling each other out. On the one hand, it is a globally appreciating dollar, and on the other hand, positive sentiment in the equity market. While the former seems relatively natural in the current conditions, the new historical highs of major market indexes can be associated with a slightly greater degree of uncertainty. Their deterioration may adversely affect the zloty's valuation.

As long as sentiment does not deteriorate, the zloty valuation should remain relatively stable. The EUR/PLN exchange rate fluctuates between 4.25 and 4.26 this afternoon. No significant changes in the sentiment should support the stability of the zloty in the following hours, also to other main currencies.

Tomorrow's preview

On Thursday, data on consumer inflation (CPI) in the USA in January will be published. This is not the most important measure of price levels for the Federal Reserve (the PCE inflation is), but the CPI may indicate what inflation trends are occurring in the economy. The median of market expectations assumes that the core inflation rate (excluding energy and food price volatility) will fall to 2.2% year-on-year (from 2.3% in December). Deviations from this consensus may increase the fluctuation of the dollar, especially if inflation turns out to be higher than expectations, matching the trend of recently published macroeconomic data favourable to the dollar.