“The Trump trade” continues to guide markets, including the currency market, strengthening the position of the dollar. Along with the falling EUR/USD exchange rate and weak economic data from Poland, this has caused the złoty to lose strength, ending the week as one of the weakest currencies in emerging markets. The coming days will bring new GDP data from the main economies, which could affect market interest rates, but these readings may yet be pushed aside by the results of further surveys from the United States.
Key points:
– Trump leads in the race to the White House, the dollar remains at the top.
– EUR/USD fell below 1.08 after dovish comments from ECB.
– The Polish złoty was under significant pressure.
– The autumn budget in the UK is set to cover major tax hikes.
The results of the U.S. presidential election remain unpredictable, however, latest polls show a clear advantage for Trump. This is resulting in higher returns on U.S. Treasury bonds over concerns about a sharp increase in debt issuance and a strengthening dollar. The dollar’s appreciation through the “Trump trade” has three pillars: concerns about high U.S. tariffs, rising market interest rates, and a general return to safe assets amid uncertainty about potential second-term of Trump’s presidency. Despite the flight of investors to the US dollar, commodity prices are holding up, which could open the way to buy struggling emerging market currencies, especially Latin America.
This week is rich in macroeconomic data. In the eurozone, the Q3 GDP reading (Wednesday 30.10) and preliminary October inflation reading (Thursday 31.10) will be key to pricing the next European Central Bank interest rate cuts. In the U.S., Q3 GDP data (Wednesday 30.10) and the nonfarm payroll NFP labour market report (Friday 01.11) will be published. However, we expect these numerous data will have to make way for the results of the polls published in the home stretch of the presidential campaign.
PLN
In the past week, the złoty took hits from several directions, ending as one of the worst performing currencies in emerging markets, losing almost 1% against the euro. The EUR/PLN level of 4.35 reached by the end of the week was last seen in June. The Polish currency has become particularly vulnerable in the face of the “Trump trade”. However, the difference in U.S. and eurozone economic performance is also leaving its mark on the EUR/USD and złoty, which closely follows this pair. News from Poland has also been rather gloomy, not helping the Polish currency’s situation.
Last week, almost all the most important readings from Poland were weaker than expected, with retail sales particularly weak. Its surprising first drop this year (-3% YoY in real terms) probably overestimates the extent of consumer demand weakness but is nonetheless a negative signal. If the data continues to disappoint, this could bring forward the timing of NBP interest rate cuts. The złoty will likely continue to respond mainly to news from abroad in the coming days. Preliminary October inflation data (Thursday 31.10), though unlikely to cause significant currency fluctuations, will also be worth noting.
EUR
Last week did not break the series of gloomy economic data from the eurozone. As for the PMI indicators for business activity in October, it can only be said they were not worse than in September, but showed no improvement either. At best, recent macroeconomic data is consistent with stagnation in the euro area economy, at worst with a quarterly fall in GDP. High employment and the absence of signs of significant job losses may however be enough for the eurozone to avoid a technical recession.
Data on GDP growth rates to be published this week (30.10) is relevant, but delayed and does not provide a clear picture of the current state of consumer demand. A more up-to-date picture will be provided by the preliminary October inflation report (31.10), which will be key to the next ECB decision on interest rate cuts. Communications from Christine Lagarde recently have been dovish, with markets currently fully pricing in rate cuts of 25 bp at each of the next four policy meetings.
USD
Economic reports from the U.S. continue to surprise on the upside, but this dynamic is largely overshadowed by headlines and polls about the presidential election, which will be held next Tuesday (05.11). According to the latest estimates from bookmakers and predictive models, Trump has a clear advantage and, according to the polls, leads in five of seven swing states (states where both parties have even support). We advise against taking the results of polls published shortly before voting too seriously and still consider the outcome of the election undecided, especially taking into account how inaccurate polls have been in recent years.
The non-farm payrolls report (01.11) is still one of the two most important readings in the world, the other being U.S. inflation. Given the recent rise in inflation, Fed’s preferred traffic-light data, PCE, to be published on Thursday (31.10), will be particularly relevant in terms of wage growth dynamics.
GBP
The British pound remains the best performing G10 currency and the second strongest after the South African rand among main currencies this year. Last week’s PMI business activity indicators were weaker than expected, however they confirmed that the UK economy is growing, unlike the stagnant eurozone economy, though at a somewhat slower pace than expected. With inflation returning below the Bank of England’s 2% target, market participants are pricing in a more aggressive monetary loosening cycle.
Wednesday’s message regarding Labor’s budget seems likely to be an unusually risky event for the pound. Major tax increases are expected, including, most probably, on capital gains, employee social security contributions, inheritance tax and pensions. Chancellor Rachel Reeves will also outline the details of the Labour Party’s fiscal rule changes, which are expected to clear billions of pounds for borrowing. If she succeeds in convincing investors that Labour’s approach can stimulate growth without causing chaos in the debt market, the pound may not be hurt – but that’s a big if.
Source: https://ceo.com.pl/efekt-trumpa-nadal-wplywa-na-rynki-finansowe-wzmacniajac-dolara-i-oslabiajac-zlotego-49068
