Will USD/PLN surprise with a permanent return above PLN 4?

The Polish zloty is still one of the strongest global currencies, and many domestic investors are asking whether it is a good time to invest in dollars or euro. However, there is never a clearly good answer to this question, because investing always involves risk.

Investors must make decisions in an environment of notoriously 'insufficient' data and draw the most correct and original conclusions possible from them. Because today The session is not full of significant readings of global macro data, and data from Spain (GDP revision) and Germany (GfK consumer sentiment) did not bring any surprise, let's take a look at the prospects for the Polish currency today.

The zloty still has strong arguments...

It is true that the USD/PLN exchange rate oscillates around the long-term trend line, which could be questioned in the scenario of a drop to around PLN 3,80. From the technical side, the area around PLN 4 seems to be a favorable (though not risk-free) zone, for buying 'cheap' foreign currencies. However, it seems that there are still strong arguments for the zloty to remain strong in relation to both EUR and USD. On the other hand, despite such 'good prospects', the pair does not want to go below the level of PLN 3,9, and PLN is by no means a 'cheap' currency anymore. Apart from economic fundamentals, FX rates are shaped largely by investor sentiment. PLN despite the prospect of maintained (high real) interest rates in Poland until the end of the year and policy easing in the summer by both EBC, and the Fed has encountered a certain barrier that will be difficult for it to break.

This situation may be partly due to geopolitics and the expected Russian offensive this summer. Investors remember the weakening of PLN in 2022, when USD/PLN exceeded the limit of PLN 5. A possible unfavorable outcome of the war in Ukraine or the destabilization of the Baltic countries would have an impact on the zloty exchange rate. These are risk scenarios that markets need to price in and it appears that they may reinforce activity in the current accumulation zone. On the other hand, any form of calming down the war mood beyond Poland's eastern border may open the way for further increases for the zloty; However, this does not seem to be a likely scenario at the moment (not that it is impossible).

…but it may encounter some resistance

From April we will see 5% VAT on food, but Polish discount stores are already trying to catch consumers by declaring they will maintain prices 'without VAT'. Given the subdued activity of buyers and the rebuilding of savings, as well as the very uncertain 'pro-inflationary impact' of 5% VAT, the Monetary Policy Council may finally give in and, 'surprisingly', reduce rates in the last quarter of the year. Especially considering they'll probably do it by then all major European central banks such as the ECB and BoE and the Fed. The question is what level inflation will be at then, because with a 10% increase in real wages y/y, consumers may increase consumption, considering product prices that are less affected by inflation as an opportunity to make excessive purchases. Nevertheless, the prospect of a soft landing in Western economies, with geopolitical risk and inflation close to the NBP target, may suggest that the strong zloty may encounter some resistance in the second part of the year - unless inflation (in particular energy prices) surprises with a spectacular rebound.

Today we pay PLN 3,96 for a dollar, PLN 4,37 for a euro, PLN 5,02 for a pound sterling and PLN 4,40 for a Swiss franc.

Source: Eryk Szmyd, XTB