Geopolitics drives the dollar. Will USD/PLN reverse the trend?

The biggest winner of recent, troubled days on global markets is certainly the American dollar. Weaker sentiment around risky assets and oil hovering above USD 90 per barrel favor safe havens. Geopolitics is on the radar of many asset managers today.

Possible escalation of the conflict

The first market reaction after Iran's armed response to the destruction of the embassy in Damascus suggested that Israel may not seek retaliation and 'make peace' without losses, as representatives of American diplomacy suggested. Meanwhile, Israel's war council and Netanyahu's position leave no doubt - The Israeli army is preparing to respond to Iran, although the Mossad indicated that a decision on it may well come tomorrow or in 30 days. This perhaps suggests a prolonged period of market tension and 'risk off'. At times it is difficult to resist the impression that the market does not want to believe in a possible wider conflict in the Middle East. However, Tehran's comments suggest a possible escalation; military officials have already said that any Israeli attack will be met with a response 'within seconds'.

Therefore, the overall landscape seems clearly pro-dollar, with the prospect of policy easing in the euro zone from June and the door open to another 'extension' of expectations for rate cuts in the US. Naturally, the Polish zloty, which has historically (though not in recent quarters) been correlated with the euro, may lose on this, especially if we take into account the fact that sentiments around the Polish currency have been very good in recent months.

The zloty is losing against the dollar

Today, investors' eyes are focused on the evening hours, when the president will be able to comment on the situation in the US economy again Fed, Jerome Powell. The next few months may bring a lot of uncertainty, as persistent inflation in services, combined with the prospect of more expensive oil, will likely encourage the Fed to remain hawkish. even 'at the cost' of not reacting to the deteriorating data from the US economy. As we approach the end of 2024, will the market price the chances of a recession higher and will the Fed pull the trigger?

Yields on 10-year US Treasury bonds rose yesterday by 9 basis points, to 4.62%, and 2-year bonds reached long-unseen levels of 5%. The technical landscape for the USD/PLN pair has improved significantly in favor of the dollar and it seems open the way to further growth. Today, the pair is losing over 0,5%, which is mainly due to weaker sentiment on global stock exchanges, the weakening euro and the uncertain situation in the Middle East.

In a broader context, the prospect of a Russian offensive and the difficult situation on the Ukrainian front also seem to be important for the gold. A possible conflict in the Middle East, a region that is more important for the global economy, combined with the prospect of inflation becoming increasingly difficult to control, may weaken Ukraine's commitment to supporting the war effort. As a result, the USD/PLN pair broke above the 200-day EMA, which we have not seen since November 2023.

We pay over 4,07 for the dollar, 4,32 for the euro, 5,06 for the pound and 4,46 for the Swiss franc.

Source: Eryk Szmyd, XTB