The war in the Middle East has entered a new and more dangerous phase. Still, investors—aware of the complexity of the conflict—are trying to remain calm. However, given how fast events are unfolding, such composure may not last. If global factors don’t outweigh local arguments, Poland’s Monetary Policy Council (RPP) may be edging closer to another interest rate cut.
U.S. vs. Iran
While people in Poland were enjoying a sunny weekend, the war in the Middle East was escalating. The direct involvement of the United States marks a new chapter in the conflict. Given the volatile nature of the situation, it’s difficult to assess the long-term consequences of this escalation.
From a global standpoint, the Strait of Hormuz—separating Iran from Oman and the UAE—remains a critical chokepoint, through which roughly 20% of global oil exports flow daily. Although the Iranian parliament has approved the possibility of blocking the strait, the ultimate decision lies with Supreme Leader Ayatollah Ali Khamenei.
At first glance, Iran may appear to hold a trump card, but the situation is more nuanced. If the strait were blocked, Iran’s own oil tankers would also face restrictions—most of which pass through this very route. Additionally, a significant portion of Iranian oil is exported to China, and Tehran likely cannot afford to endanger such a key partnership. It seems these considerations influenced investor behavior during Monday’s trading session.
Pricing in Risk: Oil and the USD
At the start of the week, investors reduced their exposure to risk, but fortunately, signs of panic did not emerge in the markets. The most telling asset amid the Middle East escalation is crude oil. Trading opened with an upward gap, reaching over $78 per barrel, testing last week’s—and five-month—highs. This initially appeared to be a rational response to rising risk. However, it was quickly followed by a sell-off.
By 3 PM, the price of Brent crude (which tends to be more sensitive to Middle East developments due to being traded in London) had fallen well below Friday’s close, trading just above $75. Investors appear to have decided that much of the recent geopolitical tension had already been priced in.
European stock markets were mostly in the red (with Amsterdam being an exception, up 0.7%), though there was no major sell-off. Unfortunately, among the weakest performers in Europe was Poland’s WIG20, down 1.3% two hours before the close.
Meanwhile, the U.S. dollar is once again displaying its safe-haven appeal, which is leading to pressure on emerging market currencies, including the Polish złoty. Although the PLN’s losses remain moderate, the trend in major currency pairs is becoming increasingly challenging for the Polish currency. The EUR/PLN pair is approaching 4.28, and USD/PLN is testing 3.73. The EUR/USD exchange rate has returned to near its opening levels, oscillating around $1.147.
Work Pays Less: More Reasons for a Rate Cut
The Polish Monetary Policy Council (RPP) has received fresh data supporting the case for further rate cuts. The most important figures come from the labor market, where wages in companies with over nine employees have resumed a downward trend. After a surprise rebound in April (+9.3% year-on-year), May saw growth of just +8.4%, well below expectations.
RPP members have repeatedly emphasized that a cooling labor market creates room for lowering borrowing costs. Employment is also declining, albeit at a steady pace of -0.8% year-on-year. To add to this, producer prices (PPI) continue to fall—a trend ongoing for two years—with the latest reading showing a -1.5% annual decline.
One data point that might contradict this trend is industrial production, which rose by +3.9% year-on-year last month. However, two points should be noted: (1) the result was still below the forecast (+4.3%), and (2) this indicator has been one of the most volatile in the Polish economy in recent quarters, making it unreliable for drawing conclusions about broader economic trends.
Overall, today’s data package strengthens speculation that the RPP could cut rates as soon as July. However, the strongest argument against such a move lies far beyond the control of Poland’s monetary authorities—namely, the potential further escalation of the Middle East conflict, which could derail many disinflationary plans.
Author: Adam Fuchs, Currency Analyst at Walutomat.pl
Source: CEO.com.pl – War, Oil, the Zloty and Interest Rates: Global Tensions vs. Local Fundamentals
