Last week was rich in central bank decisions, not all of which were in line with expectations. Among the major currencies, the dollar shined the brightest, despite not receiving any significant direct support from the Federal Reserve. In the backdrop of a strong dollar, currencies such as the Zloty struggled. Despite its depreciation, the Polish currency performed better than those close to it in the region.
The most significant was probably the announcement of the Bank of Japan, which on Tuesday raised its interest rate for the first time in 17 years – a historic move that ended an eight-year period of negative interest rates. Yet, the yen suffered a sell-off compared to similar currencies, as the bank’s communiqués had a dovish tone. The Swiss National Bank (SNB) took the opposite stance, surprising the markets by cutting interest rates, leading to an immediate depreciation of the Swiss franc. The pound also didn’t perform well, due to further signs of deflation in the UK and the dovish turn of the Bank of England (BoE).
This week should be a little quieter in the markets, but speeches by ECB President Christine Lagarde (Tuesday 26.03), revised data on economic growth in the US and the UK (Thursday 28.03), and the latest PCE inflation reading in the US (Friday 29.03) will undoubtedly be worth noting.
PLN
CEE currencies had a tough week, which can be somewhat related to the strength of the dollar. Apart from numerous central bank meetings, economists were also occupied with various data publications. In Poland, we observed a minor improvement in consumer confidence, a strong increase in wages (an impressive 9.8% increase in real terms), and decent retail sales growth (6.1% y/y in real terms). This suggests a revival in consumer spending and robust economic growth in 2024 – it remains a question how much higher earnings will translate into consumption, or into savings.
The topic of charging NBP President Adam Glapinski before the State Tribunal returned – according to statements from government representatives, he will be charged in the coming days. So far, this news has not had a significant impact on the currency market, but it remains a risk for the Zloty, even though a significant increase in volatility in this matter seems unlikely.
Attention this week will also focus on inflation. We expect that the March reading will show a further decline (Bloomberg’s consensus is 2.3%). There are some concerns about its further path, but there is hope that the inflation rise in Q2 will not be as significant as previously expected. Henceforth, the price war between major retailers and the announcement that some of them will refrain from raising prices despite the return of a 5% VAT on food, should be mentioned.
EUR
The past few weeks have seen a return of optimism about the eurozone economy, providing solid support for the common currency. It seems that macroeconomic readings from the bloc have indeed started to move in the right direction. March PMI indicators remained at stagnant levels, but the composite measure was just below the crucial level of 50 points, the highest in nine months. It should also be noted that the services indicator was higher than in February.
A good indicator of this improvement is the Citigroup Economic Surprise Index for the eurozone, which is not only positive for the first time since May but is also higher than its counterparts for the US and the UK. No significant readings will be published from the common bloc this week, but investors will be attentively listening to speeches by ECB President Christine Lagarde and Chief Economist Philip Lane.
USD
The Federal Reserve’s March statement weakened the dollar initially. The FOMC emphasized that it needs more evidence of sustained inflation decline before deciding on interest rate cuts, unexpectedly maintained its stance about three cuts this year, while markets were preparing for only two downward moves in 2024 as indicated by a change in the dot plot’s median.
However, the dollar’s decline was short-lived. This can be correlated with the upward revision of the Fed’s long-term interest rate projections – especially in the context of the 2025 median, which currently indicates only three cuts instead of four. The dovish turns of many other central banks, particularly the BoE and the SNB, supported the dollar’s attractiveness, especially in light of high nominal fed funds rates and good US economic performance. Thursday’s (28.03) GDP revision for Q4 is expected to not bring changes, however, more activity might accompany Friday’s (29.03) PCE inflation report, which is the Fed’s most important measure of price dynamics.
GBP
The last week was challenging for the pound. Ahead of the Bank of England’s Thursday decision, everything pointed to a dovish turn after February’s inflation reading missed market expectations. Both the headline and core inflation measures were lower than forecasted – the former dropped to its lowest level since September 2021, the latter since January 2022.
The pound also suffered towards the end of the week due to communications from the BoE. Not only did both hawks vote to keep rates at their current level (markets expected such a change from just one of them), but the bank surprised everyone by adding a sentence to its statement suggesting that things were “heading in the right direction.” This was a clear indication that the BoE considers rate cuts not too distant, resulting in markets almost fully pricing in the start of the bank’s policy easing in June.
CHF
A largely unexpected rate cut by the Swiss National Bank weakened the franc, causing the EUR/CHF rate to rise to its highest level since early July of just below 0.98. Drawing attention to progress in fighting inflation and real-term currency appreciation, the SNB decided to lower its interest rate by 25 bp to 1.5%, thus becoming the first G10 central bank to make such a move during this cycle. The inflation trajectory in the new projection is roughly 0.5 pp lower in the forecast horizon and reaches a maximum of 1.5%. This suggests that policymakers are convinced they have won the fight against inflation and leaves no doubt that further cuts are coming.
Markets expect another 50 bp cuts from the SNB this year. We consider these expectations entirely realistic, and we would not be surprised if the bank decided on even more substantial easing. Everything obviously depends on future macro readings, especially those related to price dynamics.
This week will be rich in significantly fewer publications than the previous one, but it’s worth paying attention to SNB data on currency transactions in Q4 and the leading KOF indicator (both on Thursday 28.03). The former will provide a better insight into the bank’s stance on the franc. The bank’s March communication on the matter was a reiteration of its December position – if necessary, the SNB is ready for intervention in the currency market.
Authors: Enrique Diaz-Alvarez, Matthew Ryan, Roman Ziruk, Itsaso Apezteguia, Michał Jóźwiak – Analysts at Ebury
