Good global moods, the zloty has a chance

Good global moods and the suspension of interest rate cuts in Poland are a recipe for a potential strengthening of the zloty. Our currency may seem overvalued, but for now the circumstances are favorable.

The market was waiting for an impulse

After the reaction to the election results, the EUR/PLN exchange rate froze at 4,45, waiting for another impulse. Even significant changes in the mood on global markets did not dispel this stagnation of the zloty market - first, the conflict in the Middle East appeared, and then was quickly ignored by the markets. Despite considerable turbulence in key markets the EUR/PLN exchange rate remained unchanged – the market was waiting for an impulse and got it in the form of the Monetary Policy Council's decision.

The Monetary Policy Council did not change the level in November interest rates. Considering the level of inflation and inflation trends in Poland, such a decision is not necessarily surprising. What may be more surprising is its comparison with the September decision, when rates were reduced by as much as 75 basis points. This decision could be justified as follows: The Council expects a significant decline in inflation and belatedly begins the cycle of cuts - after the first move, which "makes up" for lost time, further cuts are to come, in the standard amount of 25 basis points. However, after such a move in October, there is no reduction at the next meeting, and what is more, the indication of no reductions for the next few months does not fit into this narrative.

Investors will have to be patient

Therefore, taking into account a certain degree of unpredictability of the Council, we can conclude that this change is a chance for the zloty. Ultimately, it means that inflation will reach the target as quickly as possible, even if this is still quite a distant prospect. Moreover, the reaction of the zloty - although positive - was not strong, the EUR/PLN exchange rate dropped to 4,42, which was support (falsely broken briefly) before the September decision of the Council. Therefore, if the sentiment on global markets remains positive, the price will have a chance to go lowerj. Naturally, the next impulse of a domestic nature will be the economic policy of the new government, but here investors will have to be patient for a little longer.

This week, global markets are mainly waiting for inflation data from the US (tomorrow, 14:30 p.m.). The inflation situation in the West has improved significantly, and although the inflation level in the US may increase slightly in the near future for statistical reasons (base effect), next year should bring it down, especially in the context of the return of oil prices to lower levels. Nevertheless, the data in the coming months will be important in the context of how long the Fed will maintain high rates. The longer it lasts, the greater the risk of a more serious slowdown, which the market has in fact no longer priced in.

Monday morning brings a slight weakening of the zloty. At 10:15 the euro costs PLN 4,44, the dollar PLN 4,15, the franc PLN 4,60 and the pound PLN 5,08.

Source: Currency Commentary, Dr. Przemysław Kwiecień CFA, XTB