In this article, we are going to analyze the fundamental and technical background of $USD/PLN (U.S. Dollar against Polish Zloty) to determine the short term and medium term path of the pair.
From the U.S side, U.S. economy has slowed down in 2016. Most of the recent economic data coming out from U.S. has missed out the expectation. Q1 GDP came out only at 0.5%. Non Farm Payroll surprised to the downside in April, printing only 160K. Labor force participation dips after several months of increase. Retail sales, durable goods order, and consumer confidence all have also missed the expectation. Inflation expectation has continued to fall despite a 77% rally in oil's price this year.
Despite the soft U.S. data, the labor market is sufficiently firm to keep the Fed on track towards the gradual rate rise. However, the weakness in other parts of the U.S economy may compel the Fed to wait a little bit. From seasonality perspective, U.S. Dollar has performed well in the month of May. According to FBN Securities, May has been the best month for the Dollar over the last 10 years with average gains of +1.28% and max of +5.77%. Thus, the same thing may be expected this month.
From the Poland side, NBP (Narodowy Bank Polski), the central bank in Poland, recently kept the interest rate at 1.5% at the last April 6 meeting, and this is despite persistently weak inflation in the economy. Although NBP suggests that the present rate is adequate, several members have expressed concern about the low policy rate. With a relatively strong growth in Polish economy (GDP growth hits 8 year high at 1.5% in Q4 2015) and oil price recovery, it's likely to put a floor on the rate policy. Therefore, as the economy growth picks up speed, NBP can move to a tightening cycle in the second half of the year.
Weekly Chart $USDPLN
Weekly chart $USDPLN shows that cycle from 5.3.2011 low ended with wave ((W)) at 4.158. The break below the weekly trend line from 6.9.2014 low further supports the idea that at minimum cycle from 6.9.2014 is over. Weekly outlook is thus looking for more downside in wave ((X)) at least for 1 more leg lower to correct the rally from 6.9.2014. Pair also likely not only correct 6.9.2014 cycle, but also correct cycle from 5.3.2011 low as well, which implies a deeper pullback.
Daily Chart $USDPLN
Daily Chart of $USDPLN above suggests at minimum cycle from ((X)) low or from 6.9.2014 low is over, as evidenced with the break below the trend line. From ((W)) peak at 4.158, pair has declined lower in 3 swings, ending wave W at 3.7056. Wave X bounce is now in progress to correct the decline from 4.158, and another swing wave ((y)) of X higher is expected towards 3.985 - 4.036 area and can retest the broken trend line before the decline resumes.
May seasonality may favor the U.S Dollar this month and can see $USDPLN bouncing higher to 3.985 - 4.036 area. However, a robust economy in Poland, coupled with oil price recovery and high capacity utilization may see Polish Central Bank (NBP) moving to a tightening bias in the second half of the year, which is supportive to the Polish Zloty.
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