PLN dependent on GDP and PCE inflation data from the United States

The zloty exchange rate reversed after a sharp previous depreciation along with the de-escalation of tension in the Middle East, which allowed the markets to reduce the valuation of uncertainty in the form of a drop in expected volatility. It was the increase in expectations regarding the volatility on the currency and stock market in connection with previous actions between Iran and Israel that could have led to a broad sell-off of EM currencies, led by the Mexican peso (due to the high interest rate of 11% and the carry trade), but the zloty also suffered.

Volatility overvalued the zloty and its decline strengthened the PLN

The market was not prepared for such a sharp increase in expected volatility and uncertainty as to the further development of the situation, hence the violent reaction. Currently, the expected market volatility is decreasing, which may be positive for the zloty, although we are moving smoothly from geopolitical uncertainty to economic uncertainty, this time in the United States.

The dollar and euro rates may react to US data

The financial market cannot go into complete calm mode because it is waiting for key data from the US in the form of the GDP reading for the first quarter and data on PCE inflation. Let us recall that the current narrative is that the US economy is very resistant to the current level of interest rates and its resistance means that rates are expected to be higher for longer. The market even began to price in a 20% probability of a rate increase in the US... This, in turn, is related to the fact that in a strong economy, inflationary pressure is still observed. This was also supported by recent increases in commodity prices, including crude oil.

Today and tomorrow we will learn the answer to the question of how strong the US economy was in the first quarter and what the Fed's favorite measure of inflation, PCE, looked like.

The best scenario for the zloty?

For the zloty exchange rate, the best scenario would probably be one in which the US economy and PCE inflation are not as strong as currently expected. Any of these data published below the consensus may indicate a shift in expectations regarding the Fed's rate cut, which may consequently lower US bond yields and weaken the USD. This combination of factors is usually favorable for EM currencies, including the Polish zloty.

In such a case, the dollar exchange rate could fall below PLN 4 again or even go towards 3,90 again. Such a scenario would be negated by strong data from the US if the USD/PLN exchange rate exceeded 4,10. Meanwhile, the euro exchange rate could fall below 4,30, and the strength of the zloty could be negated above 4,35.

Data published today and tomorrow at 14:30 p.m.