Weaker sentiment supports the dollar (Afternoon analysis 11.05.2020)

Start of the week without significant changes in the market. Slightly worse sentiment strengthens the dollar, but the fluctuations are within the ranges observed in previous days. The same is true for the zloty: the USD/PLN pair is about 4.22, and the EUR/PLN is about 4.56.

Market is still too optimistic

Monday was marked by a slightly worse sentiment observed on the market despite the announcement of the gradual opening of world economies. Apart from the morning data on industrial production in Italy (a drop of 29.3% y/y) there were no other important macroeconomic publications today, so the market did not have much information to process either.

Despite the weaker sentiment, changes in the main assets remain within the ranges observed in recent days. This does not change the fact that some asset classes are very optimistic (such as equities) and assume a quick recovery path before the pandemic. The incoming macro data for the last two months (of the pandemic and restriction period) indicate that the recovery will proceed from a much lower level than initially estimated. This may have consequences for market sentiment in the following weeks and months. It may reverse if it turns out that the increase in activity is too slow (as expected).

Deterioration of sentiment usually means the sale of risky asset classes, including the zloty. Today, however, there was only a slight decline in sentiment. Although the dollar appreciated, its value increases were limited. According to Bloomberg, the dollar index rose by about 0.6% this afternoon, to 1253 points, but the changes in the context of the last few are small.

Today, the zloty depreciated against the main currencies (up to about 0.6%), but the changes were also within a narrow fluctuation range: the USD/PLN oscillated around 4.22 in the afternoon and the EUR/PLN around 4.56. There are no major events planned for the afternoon, so the zloty should stabilise around current levels.

Tomorrow's preview

The calendar of scheduled events on Tuesday is limited, which may suggest relatively low volatility in the main currencies. At 2:30 p.m., the Bureau of Economic Analysis (BEA) will publish data on US consumer inflation (CPI) in April. This is not the type of inflation that the Federal Reserve takes into account (PCE), but usually, the reading is associated with increased dollar fluctuations, especially in the case of the core index (without the influence of beverages and food).

Given the pandemic, this time, these data are likely to have little, if any, impact on the quotations. The market is currently largely ignoring even disastrous data, and inflation is now the least of the problems (the pandemic will have a rather deflationary character). The interest rates that have been cut due to the pandemic are likely to remain at these levels for a longer period.

However, data on consumer inflation may highlight the strong impact of the closure of the US economy and also the uneven influence on price trends of different categories of goods. The median of market expectations shows a decrease in core inflation from 2.1% y/y in March to 1.7% in April. If the decline turns out to be deeper, it may weaken the dollar somewhat, although changes will be rather limited due to the aforementioned factors.