Weaker dollar and zloty (Daily analysis 02.03.2018)

Yesterday's speech by the new Federal Reserve President and better than expected data in the industrial sector in the US were quickly eclipsed by the announcement of new duties on steel and aluminium. Further deterioration of market sentiment exerted pressure on the zloty.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• A lack of macro data may noticeably impact the analyzed currency pairs.

New tariffs in the USA a burden for the market

Large market fluctuations maintained. Contrary to the first speech from Jerome Powell, the second was received as relatively dovish. He stated that wage growth would not cause any significant price pressure. Moreover, macroeconomic data from the US economy that was published yesterday afternoon was in line with expectations.

The PMI index by ISM, which measures the activity in the industrial sector, amounted to 60.8 percentage points (by 2 percentage points above market expectations) and matched the 6.5-year record in October of last year. Data on prices in the sector appeared to be better than expected as the growth pace was the fastest that it’s been in almost 7 years, suggesting higher inflationary pressure.

Powell and PMI data quickly lose their importance after US President Donald Trump's speech. He announced a 25% import tax on steel and a 10% tax on aluminium. Therefore, some concerns have risen about customs wars between countries (including China), which could hamper rapid economic growth (currently observed). Moreover, this would mean higher prices for products made from raw materials for US companies and, as a result, for consumers.

Market sentiment has rapidly deteriorated. The main share indexes in the USA depreciated by almost 2% in the evening (Dow Jones ended the day with a 1.7% loss). The beginning of the European session also suggested that this increased risk aversion level may have all the cards today.

Trump's proposals for new duties (details published a week) depreciated the dollar. The main currency pair's quotations rose to almost 1.23 (at night) during the Asian session. However, just before 10:00 a.m. it fell to about 1.225. The dollar's weakening did not help the zloty.

Sentiment's deterioration negatively affected the zloty. Although the dollar's price fell to 3.42 PLN, the euro's price rose above 4.19 PLN, which is last week's highest level. The strong decrease in risk appetite strengthened the franc, which appreciated in relation to the dollar, the euro and the zloty. While the increased uncertainty is observed, the Swiss currency is often treated as a "safe haven" to which capital escapes. Today, its price has risen to 3.64 PLN, the highest value in three weeks.

The zloty's quotations will be closely related to the market and the dollar's behaviour today. There are no significant macroeconomic publications scheduled for today that could potentially have a positive impact on the market. Significant improvement of the sentiment may, therefore, be relatively difficult to achieve. Therefore, demand for emerging currencies, including the zloty, may continue to weaken which will worsen valuation.

If market sentiment deteriorates significantly, the euro may even exceed 4.20 PLN. However, the probability of a substantial price increase for the dollar is limited due to the customs tariffs that may be a burden on its quotations.