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Volatility in the currency market may return

INVESTINGVolatility in the currency market may return

The last two weeks have seen unprecedented calm on the foreign exchange markets. The release of macroeconomic data from the world’s largest economies and news regarding monetary policy have been scant, significantly reducing volatility. Of key importance to investors in the coming days, will be the meetings at the European Central Bank (EBC) and the Federal Reserve (Fed). We are also awaiting the upcoming discussions of the Monetary Policy Council (RPP), primarily due to the new inflation projections.

There was more activity in the bond and stock markets in recent days – investors are delaying the expected date for the first interest rate cuts, which results in key stock market indicators reaching record highs worldwide.

We focus, however, primarily on what lies ahead – we see a chance that the currency market’s volatility will return this week. Investors’ attention will be drawn to three events: The Monetary Policy Council’s meeting (result announcement on Wednesday, March 6) accompanied by a press conference (Thursday, March 7), the meeting of the European Central Bank (both results announcement and press conference scheduled for Thursday, March 7), and an employment report from the U.S. labor market (Friday, March 8).

With regard to the RPP meeting, we will mainly be looking at the new inflation and GDP projections. It is difficult to expect significant rate cuts from the Council nor any clear signs of when they will begin. We anticipate a higher level of precision in communication from the ECB. Despite receiving often contradictory information, and the change in pricing reductions being quite dynamic, we believe the Management Board may shed some light on the rate outlook. The NFP (non-farm payrolls) report, on the other hand, will provide the latest information on the state of the U.S. economy and wage growth rates, shaping expectations for the Federal Reserve meeting (outcome announcement on March 20).


The EUR/PLN rate last week twice reached the level of 4.30, but the zloty ended it slightly weaker. The zloty performed worse than most of the G10 and emerging market currencies. However, given its previous exceptionally strong performance, this does not concern us. Last week’s PMI reading for the industry was a little encouraging – its value unexpectedly rose from 47.1 to 47.9 points, which still signifies a contraction, but a result much better than that of Poland’s largest trade partner, Germany, where the indicator underwent a significant decrease.

This week, the focus will be on the RPP meeting. A change in interest rates appears unlikely, so the key factors will be announcements and – particularly – the new macroeconomic projection. Most interesting will be the central bank’s approach to assessing progress in fighting inflation. The decision will be announced on Wednesday (March 6) and there will be a press conference by chairman Adam Glapinski on Thursday. Signals from the National Bank of Poland may impact the zloty, but news from abroad will likely be crucial for the currency.


A number of slightly better than gloomily expected economic readings and mostly hawkish statements from European Central Bank (ECB) members led markets to almost fully backtrack on expectations for an interest rate cut in April, now pricing the first cut for June. Last week’s inflation reading was somewhat higher than consensus, and the Citigroup economic surprise index for the Eurozone is currently at its highest level since April.

Given the February inflation reading, lack of recent information on wage growth, and better-than-expected macro readings, it’s anticipated that the ECB won’t significantly counter such cut expectations. We expect ECB President Christine Lagarde will mostly repeat her messages from the previous meeting, with attention focusing on the bank’s revised economic projections. Such a turn of events might slightly boost the common currency.


Last week’s reading of January PCE inflation didn’t significantly enrich the picture drawn by the CPI measurement. Surprises on the upside still seem more typical recently. Combined with no signs of significant cooling in the U.S. labor market, this seems to rule out near-term rate cuts by the Federal Reserve – a first reduction is fully priced only by July.

Whether this perception holds will be seen after the NFP employment report is released (Friday, March 8). The key point, in our opinion, will be the average monthly wage growth – it has significantly outperformed expectations for some time now, and the 3-month measure indicates an approximate 6% wage growth in annualized terms. We believe the Fed will have limited room to lower rates as long as this figure doesn’t normalize significantly.


Last week brought few readings that could shake the belief that the UK economy is more resilient than anticipated and that the Bank of England won’t rush to cut rates, certainly not before the ECB does. Although the UK entered technical recession in the second half of last year, it was extremely shallow and may turn out to be short-lived – at least if recent PMI readings are any indication.

The spring budget being released this week (Wednesday, March 6) may offer additional fiscal support, as the Conservative Party will be seeking votes in the upcoming election. Chancellor of the Exchequer, Jeremy Hunt, may cut income tax or national insurance contributions. There has also been speculation about the abolition of the inheritance tax, which would be perceived as a desperate attempt to close the huge poll gap. These measures could provide some support for the pound.

Authors: Enrique Diaz-Alvarez, Matthew Ryan, Roman Ziruk, Itsaso Apezteguia, Michał Jóźwiak – Ebury analysts

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