Polish Zloty to strengthen on ECB’s stimulus measures

Even though there are several reasons to remain bearish on the US dollar, still, the investors found sanctuary in it as uncertainty increased in the global markets due to the Brexit referendum results. The reason is that the US dollar is always perceived as a currency that can remain strong during difficult times. The same notion applies to other traditional safe haven assets such as gold, silver, Swiss Franc, and the Japanese Yen.

As it would take a long time for the results of the Brexit to be really felt across the world, for the time being, other day-to- day developments drive the price exchange rates in the market.

Indirectly, this has increased the risk appetite of the investors, thereby leading to an uptrend in the Latam and Eastern European currencies. The USD/PLN (US dollar-Polish Zloty) is one such currency pair which is now indicating a trend reversal due to the following reasons.

Emerging Europe

To ensure stability in the world economy, Britain, Japan and the ECB are currently contemplating on new stimulus packages. The Japanese Prime Minister Shinzo Abe has officially confirmed that he will instruct the economy minister to structure a new stimulus package. The BoE’s governor Mark Carney indicated that the Central Bank will look at the possibility of rate cuts in August. The European Central Bank (ECB) has already started its corporate bond purchase program in June.

In March, the ECB announced its intention to expand the monthly bond purchases to a tune of €80 billion, from the previous level of €60 billion. Ultimately, these measures would weaken the Pound, Yen, and the Euro against other currencies including the Polish Zloty. Moreover, the Polish economy, according to the central bank’s economic institute, is expected to register a stable growth of 3.2% in 2016. The GDP growth is expected to be 3.5% next year. Such a scenario will add strength to the Polish Zloty.

In the US, the St. Louis Fed President James Bullard stated that the US Central bank should not rush to raise the interest rates as the job creation rate remains slow. The views of Bullard, a voting member of the Central bank’s rate-setting committee, are expected to weaken the Greenback. So, we can expect the USDPLN currency pair to decline in the weeks ahead.

A look at the chart will reveal that the USDPLN currency pair is declining after hitting the major resistance at 4.004 and also the upper band of the ascending channel. The stochastic reading shows an overbought scenario. Thus, a decline in the USDPLN currency pair can be anticipated.

So, a currency trader can go short at the current level of 4.0. To protect large losses, a stop loss order can be placed above 4.02. The trade can be closed in profit when the currency pair falls to about 3.82.

A binary trader should use the opportunity to trade a one touch put option through a broker of his choice. The contract’s target price should be above 3.87 and the expiry date should be near the end of the first week of August. Such a trade setup will vastly improve the probability of victory in the trade.

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