The dollar's rebound subdued (Daily analysis 23.03.2021)

Investment sentiment is improving at the beginning of the week. The sell-off in US Treasury bonds temporarily slows down. This paves the way for a weaker dollar and rises in the stock market, focusing on the US technology sector.

The dollar is still perceived negatively, and its strength in the Q1 is seen as a rebound from the previous year's depreciation. So far, the main currency pair (the EUR/USD) confirms the volatility range we forecast, with the "ground" near 1.1850. Demand for the common currency reappeared prior to this barrier. In turn, the previous week showed weakness in an attempt to push the exchange rate above 1.20. So far, the EUR/USD quotations resemble a snail rally and lack a directional trend.

The dollar has been off to a strong start with the relatively rapid progress of the vaccination program. But the outlook is actually much worse: acceleration of the global economy as a whole should push investors to chase yields in riskier markets, including emerging markets. The US currency will be left with fairly high inflation, a tremendous increase in debt, and a mild-mannered central bank. Yesterday's speeches by policymakers are nothing more than a repeated promise to be as patient as possible before cutting the monetary support to an economy recovering from a pandemic slump. Today's joint report by Fed chief Jerome Powell and Treasury Secretary Janet Yellen before the Senate Banking Committee, which is rising to become the event of the week, will be watched very closely.

The euro, on the contrary, has little to offer at the moment. The progress of the European Union vaccination program is a big disappointment; the restrictions will still be in place for many weeks. The single currency should benefit more from the global recovery, with the European stock market, for example, attracting capital like a magnet.

The pound is out of breath

After losing the burden of the risk of a non-contractual chaotic Brexit in the first part of the year, the British currency became a favourite of investors. The key factor was the rapid course of the vaccination program, especially compared to the European Union: almost every second Briton has already received a dose. Thanks to this, the pound was the only major currency, apart from the Norwegian krone and the Canadian dollar, which benefited from this year's oil price increases of around 25%, that was able to resist the correction in the dollar's quotations.

The pound reached the highest levels of its strength against the US dollar (multi-year highs) at the end of February and last week. The GBP/PLN exchange rate was briefly above 5.40 until a few days ago, the pound was the strongest against the zloty in almost five years, and the EUR/GBP pair also reached annual lows. Last week, the pound started to depreciate - the correction of its rally began. It should not turn into a permanent trend. The vaccination program is accelerating again: in one day more than 800 thousand people received the vaccine, the rapid opening of the economy will be an asset. At the same time, it should translate into regular positive surprises in the values of key macroeconomic indexes. This morning it turned out that employment contracted less than expected in January, and tomorrow's reading of the key economic barometer (PMI index) should confirm the strong improvement in sentiment.

Hungary and the Czech Republic towards a tightening monetary policy

Hungary and the Czech Republic will decide on Tuesday and Wednesday's interest rate level. Both are likely to see a rate hike this year. Perhaps as early as the second quarter, the first move should be made by Hungarian policymakers, who are concerned about a strong jump in inflation.

However, a hike by this date is becoming less and less likely. An important reason for tightening was supposed to be the need to counteract the overheating of the labour market, which has become less urgent due to the third wave of the pandemic and the shifting perspective of easing restrictions. This does not change the fact that contrast in monetary policy outlook is unfavourable for the zloty. If investors are going to bet on the region's currencies' weakness in the near future, the EUR/PLN should be the preferred currency pair for such market bets.