The European Central Bank (ECB) meeting last Thursday proceeded as expected — interest rates were cut by 25 basis points, and economic growth forecasts for the eurozone were significantly revised downward. However, the bank’s actions stand in clear contrast to the anticipated “hawkish cut” by the Federal Reserve this week. As a result, the U.S. dollar was the best-performing currency among the G10 last week.
Key Points:
- USD performs strongly ahead of the Fed’s “hawkish cut.”
- ECB cuts rates and growth forecasts.
- The outlook for the Polish złoty leans upward for the coming days.
- The BoE is expected to hold rates and signal gradual cuts.
Emerging market currencies showed more varied performance. Most experienced a slight rebound after sharp sell-offs in 2024, which had pushed them to unjustifiably low levels.
This week, markets will focus on the Fed’s final meeting of the year (Wednesday, Dec 18). A 25 bp rate cut is widely expected, but we believe the key aspect will be the “dot plot” outlining the future rate path. On Monday, PMI indicators for business activity in the G3 economies will be released. A significantly better reading from the eurozone suggests that the low levels from last month were largely a reaction to Trump’s presidential election win. This week will also feature the Bank of England (BoE) meeting (Thursday, Dec 19), preceded by UK labor market data (Tuesday, Dec 17) and an inflation report (Wednesday, Dec 18). The days ahead will also be busy for domestic market data, including core inflation, wage growth, and retail sales.
PLN (Polish Złoty)
It was a relatively calm week for the Polish złoty. With few domestic market publications, the złoty relied on external factors — the euro’s weakness due to the ECB’s downgraded growth forecasts and U.S. inflation data indicating some resistance. Notably, Poland recorded its first current account surplus since June, a fundamentally positive factor for the currency. This was largely due to a favorable balance of services and money transfers, though the trade balance has remained negative for six months, reflecting divergent consumer demand trends in Poland and the eurozone (which accounts for nearly 60% of Polish exports).
This week promises to be more eventful for macroeconomic data. Key reports for November include core inflation (Monday, Dec 16), wage growth, employment, and industrial production (Thursday, Dec 19), and retail sales (Friday, Dec 20). These local reports may be overshadowed by the FOMC meeting on Thursday or G3 PMI data on Monday.
After the EUR/PLN pair dipped below 4.26, hopes emerged for breaking the psychological barrier of 4.25 in the coming days. However, we see the balance of risks for the złoty as upward, meaning potential downward pressures dominate.
EUR (Euro)
The ECB’s final meeting of the year delivered exactly what markets expected: a 25 bp rate cut and downgraded economic growth forecasts for 2025 and 2026, which ECB President Christine Lagarde noted are threatened by Trump’s tariffs. HICP inflation projections remained largely unchanged, though core inflation was revised downward.
Worsening economic prospects suggest further rate cuts are likely at all bank meetings in the first half of 2025. This had a moderate impact on the euro, as markets had already priced in both the cut and dovish signals. The euro ended the week just above $1.05. The euro faced a test with Monday’s December PMI release (Dec 16). A stronger-than-expected reading (49.5 vs. 48.3) suggests that last month’s decline was largely a reaction to Trump’s presidential victory.
USD (U.S. Dollar)
The November inflation report largely met expectations. Notably, the monthly figure stayed at 0.3% for the fourth consecutive time, translating to an annualized rate just below 4%. This will undoubtedly be noted by FOMC members, raising concerns that efforts to reduce inflation may have stalled.
We expect the Fed to cut rates by 25 bp this week but to deliver hawkish forward guidance. Fed Chair Jerome Powell will likely emphasize that U.S. economic growth remains strong and job openings are holding up despite poor October non-farm payroll data. The dollar’s reaction will hinge on the dot plot’s suggested number of rate cuts. Futures markets currently price in three cuts for 2025, but we think the Fed will struggle to justify more than two.
GBP (British Pound)
October GDP data was disappointing — for the first time since the COVID-19 pandemic, the monthly indicator showed two consecutive declines (a modest 0.1%). This week, preliminary December PMIs, labor market data for October and November, and the November inflation report will be released, followed by the BoE’s final meeting of the year.
Despite numerous economic reports preceding the meeting, we believe they are unlikely to change policymakers’ stance — a pause in the rate-cut cycle seems almost certain. Markets currently assign only a 16% chance of a cut on Thursday. These reports may, however, influence the number of policymakers voting for a cut (current consensus: 7 for holding rates steady and 2 for a cut). We believe high interest rates, resilient growth, and stronger EU ties will support GBP appreciation in 2025 against both the dollar and euro.
Authors: Enrique Díaz-Alvarez, Matthew Ryan, Michał Jóźwiak, Eduardo Moutinho – Ebury Analysts
Source: CEO.com.pl
