The beginning of the year was favorable for the euro, with increased volatility in the currency market. The market is awaiting decisions from central banks. In Poland, an interest rate cut may occur in the last quarter of this year.
The euro made significant gains at the start of the year, particularly against the US dollar, which had been strengthening in anticipation of Donald Trump’s presidency. However, as doubts grow over the potential impact of new tariffs, questions arise about whether they could weaken the US economy. When it comes to the euro, it is important to consider inflation, which remains significantly above the target level. This means that expectations for stronger rate cuts from the European Central Bank (ECB) may not materialize.
“The volatility in the currency market at the beginning of January was very high, but we should not rule out a return to the trend seen at the end of 2024, when the dollar was strengthening. This is even more likely now that the market has begun to assess ECB rate cuts differently,” said Michał Stajniak, Deputy Director of the XTB Analysis Department, in an interview with MarketNews24. “The market now expects ECB cuts to be less aggressive.”
Eurozone inflation for December came in at 2.4% year-on-year, which was in line with expectations, though up from 2.2% year-on-year. Core inflation remained stable at 2.7% year-on-year. Both of these measures, especially core inflation, which seems crucial from the central bank’s perspective, remain well above the target level. This may suggest that, even amid economic challenges in the eurozone, the ECB might not consider stronger interest rate cuts this year. On the other hand, the market is pricing in a relatively clear path for interest rates. The ECB is expected to make a cut in January, followed by another in March, and likely in April. The last cut should take place in September, bringing the deposit rate from the current level of 3% down to 2%. However, if inflation rises again and fails to meet forecasts, the ECB might decide on more moderate cuts.
At this moment, the market is pricing in three consecutive rate cuts, which seems like an aggressive pace of reduction. If investors change their minds, this could support the euro in the near future.
The US dollar had gained significantly since the US presidential election, but uncertainty over how US trade policy will unfold may also work against the dollar. Trump had promised strong tariffs on all products entering the US, which could potentially lead to higher inflation, which would benefit the dollar. On the other hand, the Federal Reserve cannot influence inflation related to food or fuel, which are some of the most volatile components in the inflation basket.
US Treasury yields have surged, slowly approaching the psychological barrier of 5% for 10-year bonds, a level not seen since October 2023. In the past month, yields have risen by about 50 basis points to 4.7%, signaling a significant deterioration in market sentiment in the debt market.
The pressure on yields is coming from a combination of factors: concerns about future fiscal and inflation policies under Donald Trump, strong macroeconomic data, and increased supply of corporate and government bonds. Paradoxically, rising yields are occurring at a time when the market expects the Fed to ease its monetary policy.
The base scenario still expects the US dollar to strengthen in the coming months, although the first days of January have undermined the dollar’s position in the market.
From the Polish perspective, there is also weakness against the dollar, even though the National Bank of Poland (NBP) does not plan to cut interest rates in the near future. However, this could change, as the freezing of energy prices may not necessarily lead to rate hikes, given that futures prices are lower than during the freeze. Therefore, it cannot be ruled out that interest rates in Poland will be cut at the beginning of Q3, although a more likely scenario seems to be the fourth quarter. Currently, the USD/PLN pair is moving back to around 4.15, although at the end of December or January 6th, we saw levels closer to 4.07.
“The volatility in the USD/PLN pair is very high, with daily changes in January reaching 5-10 groszy. Trump’s policies could weaken the dollar,” said Michał Stajniak from XTB. “While we have seen levels around 4.10-4.15 PLN, I see potential for the pair to approach the 4.15-4.25 zone in the coming weeks. On the other hand, the EUR/PLN pair has been very stable in recent months, oscillating close to 4.25, and we should not see levels above 4.30 in the near future.”
Source: ManagerPlus
