The Polish Zloty reached its highest levels against the reference Euro on Monday morning since February 2020. Among factors favorable for the Polish currency recently, focus lies in the issue of the difference in interest rate outlooks between Poland and the primary economies.
While the European Central Bank suggested a rate cut in June, not ruling out a complete move in April, a weaker report from the U.S. labor market allows for a similar timeline for the Federal Reserve. Moreover, more persistent inflation in the U.K. implies distant prospects for rate cuts from the Bank of England.
The currency movements last week reflected these developments: the U.S. dollar weakened against other G10 currencies, while the Pound fared better than the Euro. The winner of the week, however, was the Japanese yen, which underwent strong appreciation after signals suggesting that the Bank of Japan might start raising interest rates from negative levels later this month.
This week will be pivotal for the narrative in which inflation is under control, and central banks are ready for cuts. On Tuesday (12.03), we will get to know the February report on U.S. CPI inflation. The most critical piece will be the monthly core measure, excluding food and energy price fluctuations. Not much is happening in the Eurozone, but the week could be full of volatility for the Pound – Tuesday (12.03) will bring a report from the U.K. labor market in February and Wednesday (13.03) will reveal the monthly GDP for January. Publications from the domestic market will not be numerous, and the main focus will be on Friday’s (15.03) reading of February inflation, which, according to President Glapiński’s words at last week’s conference, will hit the NBP’s inflation target (2.5% ± 1 pp.).
PLN
The Zloty ended the week at the peak of the regional currency table, and at the beginning of the current week, the EUR/PLN pair fell to the lowest level since February 2020 at 4.27. Recently, attention in the country has focused on the Monetary Policy Council’s meeting and its Chairman Adam Glapiński’s rhetoric, along with new macroeconomic forecasts. The bank predicts stronger economic growth and lower inflation than forecasted in November.
However, there is also uncertainty regarding regulated prices, with an unlikely, worst-case scenario depicted by the bank involving inflation rising to 8.4% in the fourth quarter. Over the last few days, the market has once again lowered its rate cut expectations in Poland. We might see further strengthening of the Zloty if the NBP does not relax its monetary policy while interest rates begin to fall in major economies. This week, the essential figures will be data on February inflation (Friday, 15.03). Inflation is expected to return to target (2.5 ± 1 pp.) after almost three years, with Bloomberg consensus forecasting a 3.2% reading. Data on the current account balance, published on the same day, may also be noteworthy, although it is unlikely to significantly impact the Zloty.
EUR
Last week’s ECB meeting left markets with the impression that huge rate cuts are close – not at the April meeting but at the next one, in June. Christine Lagarde, the President of the bank, said that although discussions about rate reductions have not yet started, the ECB has revised its inflation projections downwards, and Lagarde specifically stated that by the time of the June meeting, the bank will have more information.
Bright spots in recent economic data support a cut later than April – PMI indicators have moved off their lows but still show little more than stagnation. Thanks to high tourism revenues – especially from U.S. tourists – France, Spain, and Italy perform above expectations, compensating for the very weak German industry. Nevertheless, there is still a gap between economic performances on either side of the Atlantic, so we consider the Euro’s appreciation to be temporary.
USD
The labor market report was somewhat disappointing. Despite the number of new jobs remaining at a good level, we noted a substantial downward revision of January data, dimming optimism. Unemployment has unexpectedly climbed by 0.2 percentage points (still, however, at a low level), and importantly, wage growth disappointed and was the lowest monthly level in two years – the three-month average has dropped just below 4% annualized.
This report confirms the Fed’s narrative that the disinflationary trend persists, the economy remains slow, and a monetary policy easing may be necessary, most likely in June. Consequently, the dollar suffered, although the weakening was moderate, as new data didn’t significantly affect the interest rate differentials between the U.S. and other G10 economies – monetary relaxation is also expected in all other major economies except for Japan.
GBP
The spring budget didn’t surprise markets – the tax stimulus included was moderate, and widely priced-in. As expected, National Insurance contributions were cut by 2 pp to 8%, a super-profit tax was expanded for oil and gas producers, while income tax bands remained unchanged. The Office for Budget Responsibility (OBR) revised growth forecasts upward until 2026, in line with improved readings from the British economy we’ve seen this year.
Data from the labor market and monthly GDP, to be published later this week, will be more important. The job market is expected to remain at full employment with wage dynamics above 6%, and the economy is set to return to growth. These readings will be key for the Bank of England’s March 21st meeting. Currently, markets do not fully price in rate cuts before August, a relatively hawkish stance that provides solid support for the pound.
Authors: Enrique Diaz-Alvarez, Matthew Ryan, Roman Ziruk, Itsaso Apezteguia, Michał Jóźwiak – Ebury analysts
