Zloty as a winner (Afternoon analysis 21.03.2019)

There are significant market events happening: the very dovish Federal Reserve and the growing uncertainty around the Brexit. In the light of these events, the zloty is appreciating - it is also supported by a series of better than expected data from the Polish economy.

Growing security buffer of zloty

Two events are currently having the greatest impact on the market: the Brexit and the further easing of monetary policy by the Federal Reserve. Tensions over the UK's departure from the EU could continue almost until the last minute. This increases the risk to the pound, at least in the short term, putting supply pressure on the British currency. Practically nobody in the British Parliament wants a hard Brexit, so in the long run, the pound has a considerable potential for appreciation (even more than 10%, considering the recent depreciation).

Yesterday evening, the Federal Reserve gave a signal to the market that, like the ECB in the eurozone, it did not intend to raise interest rates this year. Moreover, it has cut back slightly the GDP growth forecasts. It seems that it would take a series of exceeding expectations data from the US economy, a solution to trade issues with China and unexpected improvement of the eurozone to return to the issue of monetary tightening this year. These factors seem unlikely to be realised at the moment. This should prevent the dollar from appreciating strongly. In the current year's perspective, the large difference between the US and eurozone economies should support the dollar, keeping it on a long-term upward trend.

The mild Fed and the weaker dollar today is the best thing for the zloty. The Polish currency appreciates most often in such conditions and it is no different now, too. It is also supported by a series of data exceeding expectations from economies. Retail sales data published today by the Polish Central Statistical Office (GUS) in February were another positive reading recently, after industrial production, current account surplus, (minimally) higher inflation and sentiment records of households. The prospect of no rate hikes in Poland in the predictable future is likely to have moved away even after the Fed and the ECB withdrew from them, limiting the zloty's growth potential. Nevertheless, the market situation is currently protecting the Polish currency against a deeper depreciation. In an interview for "Parkiet", economic expert and MPC member Eugeniusz Gatnar said that an interest rate increase at the end of 2019 may be taken into account, but he is in a minority and the increase this year, before the largest central banks, should rather be excluded. The EUR/PLN quotations fell below 4.28 today, to their lowest level since the beginning of February this year. The main fluctuations should be limited to the GBP/PLN pair in the coming week, to a lesser extent to the USD/PLN pair.

Tomorrow's preview

At 10:00 a.m., IHS Markit will publish preliminary March PMI index data for the eurozone's industrial and services sectors. Earlier, at 9:15 and 9:30 a.m., data for France and Germany will be published. The median of economists' expectations assumes small changes in the indexes. After cutting back growth forecasts for Europe's largest economies, as well as for the eurozone as a whole, we should not expect a rapid growth of these indexes - at least until macro data showing a return to a faster growth path. In the context of yesterday's events - the dovish attitude of the Fed - a positive surprise from the PMI indexes could further strengthen the euro. However, it must be remembered that the US economy is currently in incomparably better shape than that of the eurozone. Therefore, the potential growth of the euro and the fall in the dollar are limited.

All the time large fluctuations can also be expected in the pound quotations. Tomorrow there is no key vote on the Brexit scheduled, but Friday is the second day of the EU summit on which this issue will be addressed. The reports that will come in may significantly increase the volatility range of the British currency. Especially as it is the last day before the weekend, uncertainty around the Brexit has recently increased and some investors may close their positions, potentially increasing tomorrow's volatility in the pound's value.