The EU stimulus package improves sentiment (Daily analysis 27.05.2020)

Another day of positive sentiment weakens the dollar in the global market and strengthens the currencies of emerging countries, including the zloty. The stimulus package worth 750 billion EUR announced by the EC has further increased this optimism.

Additional injection of aid to the Member States

On Wednesday morning, positive sentiment continued to dominate in the broader market. And this is likely to be maintained later in the day after another dose of positive information from the EU. Paolo Gentiloni, European Commissioner for Economy, confirmed the 750 billion EUR stimulus programme on Twitter.

A little more details were unofficially provided by Bloomberg. Of the total that will be lent on the financial market, 500 billion EUR will be injected in the form of grants for EU countries (as agreed earlier by Angela Merkel and Emmanuel Macron) and the remaining 250 billion EUR in the form of loans.

The EC's proposal assumes that Italy would receive about 82 billion EUR, Spain 77 billion EUR, Poland about 38 billion EUR, and Greece about 22 billion EUR (these countries will still receive other types of loans). This information additionally reinforced the already positive sentiment, as well as the euro on the global market.

The dollar still under pressure

The main currency pair, i.e. EUR/USD, was close to the boundary of 1.10 yesterday, although it eventually moved to around 1.0950. After reports on the stimulus package for EU countries, the EUR/USD exchange rate rose to around 1.1030. This is the highest level since the last days of March, also highlighting the current market sentiment.

A market that is still largely "detached" from the fundamental reality of a deep recession. It is, of course, based on completely different fundamentals than the financial crisis of a decade ago, and the fiscal and monetary response was quicker and stronger. However, there is still a great deal of uncertainty about how consumer demand will develop in the coming months, and thus how the recovery path to pre-pandemic economic levels will look.

However, in the current atmosphere of gradual removal of restrictions and the opening of economies, the market is only focused on this positive information, and these good sentiments should, at least in the short term, maintain a relatively high level of risk appetite and a weaker dollar. These are the two components that support the zloty, which is also reflected in its appreciation against the main currencies.

The zloty continues to strengthen

The USD/PLN exchange rate is close to falling below 4.00 (around midday it was 4.0170). The last time we observed such levels was in mid-March. The EUR/PLN exchange rate was almost fixed today around midday (compared to yesterday's closing), due to the strengthening of the euro on the global market. Nevertheless, the exchange rate of about 4.44 (today's range is about 4.4060-4.4450) is clearly below the range of about 4.53-4.57 observed last week.

The continuation of positive sentiment on the global market may further strengthen the zloty, but when the reality begins to catch up with the optimistic market, we may observe a return of increased risk aversion in the following weeks and beyond (to which are added geopolitical issues, such as the US-China conflict).