If subsequent data from the US deteriorate, then the chances of a significant rate cut in May could significantly increase. This would be an opportunity for many currencies that have recently been oversold, including the Polish Złoty.
Investors’ sentiments are at least optimistic, but this is happening at a time when the state of the global economy remains uncertain. Citigroup’s CFO, Mason, pointed out that he expects a slowdown in consumer spending growth in the US.
Most economists expect the Fed to cut rates this year by either 75 or 100 basis points, which currently seems to be a “doveish”(less aggressive) prediction by the Monetary Policy Council. The arguments for deeper falls in USDPLN and EURUSD still remain on the table.
Data showed a decrease in inflation in the US, but it was significantly smaller than expected, which deferred the possibility of interest rate cuts. On the other hand, hard data on economic activity were disappointing. Will the Fed take note of the actual economy, which is struggling somewhat and decide to make quicker cuts than in mid-year? Could this be a catalyst for further strengthening of the Polish Złoty?
The CPI inflation rate in the US turned out to be 3.1% YoY, with estimated 2.9% YoY. The core remained at 3.9% YoY, despite a further decrease expected. The PPI inflation rate also turned out to be higher than expected. The base rate, which rose to 2.0% YoY from 1.7% YoY, was particularly surprising.
This indicates that the inflation bottom in the US may be very close and reaching the inflation target will not be faster, but in line with what the Fed expects.
“There is pressure related to weak data from the real economy, exemplified by retail sales for January,” said Michał Stajniak, expert at XTB, in an interview with MarketNews24, “Although inflation was slightly higher than expected, it’s also noticeable that the economy is slightly out of breath.”
Retail sales for January fell by as much as 0.8% MoM, while industrial production fell by 0.1% MoM despite expected growth. If the weakness of consumers and the economy proves to be more than temporary, it may signify that the Fed needs to decide rather quickly on cutting interest rates in order to achieve a soft landing. Keeping real interest rates too high for an extended period may lead to further economic downturn and also worsening situation in the labor market. Once hefty layoffs begin, they will not be easy to stop.
At this point, the probability of cutting interest rates in March is close to zero. In May, the market prices less than a 40% chance of a cut and a full reduction is priced in for June. The key question at the moment is the state of the US economy.
“Despite a slight weakening, the dollar is still strong, which is evident in the EURUSD currency pair, remaining below the level of 1.08,” comments an XTB expert.
The overall picture of our national data leads to the conclusion that Poland’s GDP will maintain its upward trend, with strong consumption readings, so the strengthening of the Złoty, with USDPLN again falling below 4.00, should not be surprising.
Employment in Poland increased by 0.3% MoM compared to 0.4% previously and 0% reading in December; year-on-year it fell by 0.2% – as expected. On the other hand, producer prices fell by a record 9% YoY compared to an expected drop of 8.3% and 6.4% reversal in December. January’s sold industry production grew by 1.6% annually, below the 3.1% expectations; in monthly terms, industry sales grew by 2.3% compared to 3.8% forecast and nearly 10% drop previously.
“The Złoty is also strong, it is on a wave because financial markets see potential in developing countries,” explains M.Stajniak from XTB. “The situation on the WSE is also a confirmation, we have had massive increases in the WIG and WIG20 recently, although the index increases in Hungary were even higher.”
Although the Złoty does not have too much room for further strengthening, in an extreme case of a strong economy, limited inflation and maintenance of interest rates, a level of 3.70-3.80 zł cannot be ruled out.
“This is a ‘bullish’ scenario, possible in a situation when there are no interest rate cuts in Poland this year, the economy’s data will be good, and inflation remains at a lower level from the last month when there are simultaneous interest rate cuts in the US.” For me, the base scenario is that by the end of the year, the Złoty will have a chance to stay below the level of 4.0.”
