The season of December decisions by major central banks is in full gear. Policymakers are delivering rate cuts just in time for the holidays, though some are more generous than others. The currency markets are reacting strongly to these changes, increasing volatility. The U.S. will announce its move next week, but they couldn’t stay in the shadows, surprising the markets today with key data releases.
A Fall from the Alpine Peaks
The Swiss National Bank (SNB) shocked the markets by cutting interest rates by 50 basis points (expectations were for a 25 bp cut). This brings the main rate to just 0.5%. For context, the current cost of credit in Poland is 5.75%. Returning to the Alpine context, Switzerland is edging closer to familiar territory – negative interest rates. They maintained rates below zero for over seven years, until mid-2022.
The immediate effect of this surprising decision was clear in the currency market, causing a sharp depreciation of the Swiss franc. The CHF exchange rate against the Polish zloty dropped by 3 grosze, reaching 4.57 PLN. However, in the following hours, the zloty proved insufficiently strong to maintain these gains, and the CHF/PLN rate rebounded. By 3 PM, the rate was once again near the morning low.
While the scale of the cut was unexpected, the direction of SNB’s actions remains clear. Inflation is low (0.7% year-over-year), quarterly GDP growth is only 0.4%, and the franc’s strength is hurting exporters. There is room for further easing, with the SNB focused on boosting inflation and weakening the franc, which complicates this process. However, global risks are increasing, not decreasing, making it difficult for the franc, a safe-haven currency, to weaken significantly.
Has Europe Defeated Inflation?
With the December meetings of central banks in full swing, we also learned of the European Central Bank’s (ECB) decision today. As expected, the ECB cut rates by 25 basis points, bringing the deposit rate to an even 3%. This is now 100 basis points below the peak of the tightening cycle. There were no major changes in the ECB’s communication, though inflation projections suggest victory over high price growth. The Consumer Price Index (CPI) is forecast to average 2.4% in 2024, 2.1% in 2025, and 1.9% in 2026.
If these forecasts hold true, the path remains open for gradual rate cuts, especially given the challenges facing the major eurozone economies, which seem to need stimulus. Perhaps these market expectations contributed to the euro’s decline following the ECB’s announcement. However, the Americans once again added their two cents.
Producer Prices Cause Concern
Shortly after the ECB’s decision, data from the U.S. was released. Weekly jobless claims surprisingly exceeded expectations by over 20,000. This isolated piece of data could have weakened the dollar by reinforcing expectations of a rate cut by the Federal Reserve next week. However, investors focused instead on a more significant surprise – producer price inflation (PPI).
November’s PPI came in at 3%, surpassing both the previous reading and forecasts (both at 2.6%). This marks the highest reading since February 2023. Producer prices can eventually translate into higher retail prices. This will likely reignite debates over the Fed’s next moves and future monetary policy. Consequently, the dollar strengthened after 3 PM, pushing the EUR/USD rate down to $1.048. This also affected the USD/PLN rate, which stayed around 4.07 PLN, and the EUR/PLN rate, which hovered near 4.26 PLN. The Polish zloty’s response to global market events was relatively solid.
Author: Adam Fuchs, Currency Analyst at Walutomat.pl
Source: CEO.com.pl
