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Indices Climb to Record Highs, Central Bank Decisions Key for Markets

INVESTINGIndices Climb to Record Highs, Central Bank Decisions Key for Markets

Indices SP500 and Nasdaq Composite grew by 1.2% and 2% respectively yesterday, closing at record highs. The Dow Jones gained a modest 0.3%, but it was not enough to reach a new peak. Yesterday’s ADP data for May showed the slowest job growth rate since the beginning of the year, following weaker-than-expected job numbers in the US on Tuesday. The ISM report for the American industry surprised with its strength. The Monetary Policy Council (RPP) maintained interest rates at the current level, while the Bank of Canada lowered its monetary policy parameters by 25 basis points. Today, the European Central Bank is likely to ease monetary conditions.

Yesterday, the Polish złoty strengthened, influenced by the RPP’s decision to keep interest rates unchanged and the official post-meeting communiqué. The reference rate remains at 5.75%. The decision was in line with market expectations. The Council still sees risk factors that could push inflation higher in the coming months, noting weakening demand and cost pressure. Combined with weak external economic conditions and declining price growth dynamics abroad, inflationary processes in Poland are expected to gradually ease. Recent CPI data has brought positive surprises, with indicators falling faster and the process being more durable. Now we await the July projection, which might reflect a lower inflation path. The Council remains on a restrictive course, which the market interpreted positively, resulting in a stronger złoty. The EUR/PLN exchange rate fell from 4.3150 to 4.29 yesterday and is around 4.30 this morning.

Today’s main event, and possibly of the week, will be the European Central Bank’s decision. The ECB is expected to make its first interest rate cut by 25 basis points from 4.5% to 4.25% (refinancing) and from 4.00% to 3.75% (deposit). The high, restrictive level has been maintained for eight months. In recent weeks, the change has been clearly communicated by central bank representatives. According to them, medium-term inflation prospects have improved, and factors that might increase CPI indicators in the future are considered temporary. Additionally, inflation expectations among consumers are falling, supporting monetary easing. However, wage pressure remains a risk factor that could accelerate price growth, although this process will be long-lasting. Recent data on negotiated wages in the eurozone in the first quarter of this year surprised negatively. Results for the second quarter will be crucial. We are unlikely to hear a clear declaration about the pace of future cuts, which will likely depend on incoming data. The ECB’s press conference, especially Christine Lagarde’s statements, will be crucial. If her remarks are strongly hawkish, suggesting that rates will remain high longer, the euro may strengthen, pushing the main currency pair above 1.09.

Łukasz Zembik, Oanda TMS Brokers

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