Will the dollar fall below PLN 4?

Last week we learned a lot of important data from the perspective of the American economy. The data showed a decline in inflation, but much less than expected, which postponed the prospects of interest rate cuts. On the other hand, hard data on economic activity disappointed.

Will the Fed pay attention to the real economy which he's not doing very well and decide on faster reductions than in the middle of this year? Will this be a catalyst for further strengthening of the Polish zloty?

Fed heading towards a soft landing?

CPI inflation in the USA it was 3,1% y/y, with expectations of 2,9% y/y. The base rate remained at 3,9% y/y, although a further decline was expected. PPI inflation was also higher than expected. What surprised us most was core inflation, which increased to 2,0% y/y from 1,7% y/y. This indicates that the US inflation trough may be very close and achieving the inflation target will not be faster, but in line with what the Fed expects.

On the other hand, we also learned disappointing data on economic activity. Retail sales for January fell by as much as 0,8% m/m, while industrial production fell by 0,1% m/m amid expectations of growth. If it turns out that the weakness of consumers and the economy is not just temporary, it may mean that the Fed needs to decide to cut interest rates quite quickly to achieve a soft landing. Maintaining real interest rates for too long may result in further economic collapse deterioration of the situation on the labor market. Starting a heavy layoff will not be easy to stop later.

Illusory recovery of the economy

At this point, the probability of an interest rate cut in March is close to zero. In turn, for May, the market estimates there is less than a 40% chance of a cut and the full cut is priced in June. The key question at this point concerns the state of the economy. Are we really already at the bottom, or was the recovery in the previous months only illusory? If the data is to deteriorate further, then the chances of a May reduction will increase significantly and it will be an opportunity for many currencies that have recently been sold out, including the Polish zloty.

Although the zloty does not have much room for further strengthening, a return of USD/PLN below PLN 4 cannot be ruled out, and in the extreme case of a strong economy, limited inflation and maintaining interest rates, even the level of PLN 3,80 cannot be ruled out. Apart from the Polish zloty, the British pound looks very interesting. The economy appears to be past the turning point, and even with the recent lower-than-expected inflation reading, the chances of reductions before mid-year are rather slim.

Before 10:00 a.m. we pay PLN 4,0197 for a dollar, PLN 4,3348 for a euro, PLN 5,0740 for a pound, PLN 4,5620 for a franc.

Source: Michał Stajniak CFA, XTB