Last week was exceptionally poor in macro readings and news about monetary policy, and most major currencies stayed within very narrow ranges. Despite this, the Polish złoty managed to strengthen to the strongest position since mid-December.
The pound and the euro moved very similarly, gaining slightly against the dollar, but ultimately no major trend was visible. This week, we should see more volatility, although there will still be relatively few data points able to move the markets. The most important will be the publication of the Preferred by Fed PCE inflation measure for January (Thursday 29.02) and the preliminary reading of February price dynamics in the euro-zone (Friday 01.03). The week will be completed by a series of speeches by officials from the Federal Reserve, the European Central Bank, and the Bank of England.
PLN
The złoty was marked by some strength last week – it performed better than the other currencies in the region and G10 currencies, strengthening to the strongest position since mid-December against the euro (4.30). We associate this with a positive sentiment towards risk and favorable local news – in particular, the confirmation that the European Commission intends to unlock 137 billion euros from the cohesion and reconstruction funds this week, which was announced by Ursula von der Leyen during her Friday visit to Poland. Nevertheless, given that investors expected the funds to be unblocked after the October elections, it is difficult to say for sure whether it will not end with a short-term impulse. There’s a possible scenario in which the markets quickly shift their attention to other topics.
In addition to the above, last week brought many macroeconomic readings from Poland, which paint a rather mixed picture of the beginning of the first quarter. Solid retail sales and strong wage growth are positive. However, industrial production and disastrous data on construction and assembly production disappointed, suggesting that the recovery is uneven and the economy still needs time to get back on its feet. Uncertainty in terms of inflation is not declining, as the signals regarding it are similarly ambiguous. Additional context this week will be provided by the GDP revision in the fourth quarter (29.02) and the PMI reading for manufacturing (01.03). However, they are unlikely to affect the złoty, whose exchange rate should depend more on news from abroad, changes in risk sentiment, and positioning.
EUR
The PMI indicators for the eurozone continue to depict a shrinking economy, dragged down by problems in the industrial sector and poor demand in China. However, some optimistic signals have surfaced. After half a year, the services PMI returned to the marginal level of 50pts, which raised the composite index to 48.9, possibly indicating a light at the end of the tunnel.
The preliminary inflation reading (01.03) will be key in determining the timing of ECB rate cuts, which we continue to expect earlier than from the Fed.
USD
Last week’s US data continues to paint a picture of a robust US economy. The composite PMI fell slightly, dragged down by the services indicator. Unlike the situation in the eurozone, all key measures point to expansion, and the manufacturing PMI is the highest in 17 months. Furthermore, the number of initial jobless claims (which returned to around 200k) indicates the continued strength of the US labor market.
This week, both markets and the Fed will focus on the bank’s preferred PCE inflation measure – specifically, whether it will be as concerning as January’s CPI inflation. Any upward surprises could allow the dollar to break out of the narrow range it has been in since February.
GBP
The PMI indicators for business activity bolstered optimism about the growth prospects for the UK economy in 2024. The composite index slightly exceeded expectations. A level of 53.3pts suggests quite a healthy expansion driven by services, while the industry lags behind.
The readings from the UK contrast with those from the eurozone and, in our opinion, are the main factor allowing the pound to perform so well in 2024. This week, no major data will be released, so the exchange rate of the British currency will mostly depend on news from abroad.
Authors: Enrique Diaz-Alvarez, Matthew Ryan, Roman Ziruk, Itsaso Apezteguia, Michał Jóźwiak – Ebury analysts.
Post Major pairs without major changes, but the złoty is stronger appeared for the first time in CEO Magazine.
