A strong half of the year for the Polish zloty?

Today's macro calendar is not very busy, and investors are waiting for key readings and decisions of central banks, which will be announced this week. We can already say that last year's expectations regarding the scale and pace of Federal Reserve rate cuts were met probably greatly exaggerated. Even though bankers communicate their readiness to make cuts, it seems to be limited, and each decision will involve some risk. Also, the latest readings of the US economy, with the exception of weaker regional indices, suggest that the labor market is very strong and inflation expectations are falling.

All this leads to the forecast of cautious cuts in 2024, which seem favorable for Wall Street and likely favorable for the US dollar, because it must be taken into account that currencies are always valued in relation to other currencies. There are many indications that the advantage of USD over EUR will continue.

The "twilight of the dollar's domination" is premature

Today, the only macro readings that may bring volatility on the largest pair will be the reading of the regional Fed index, from the Richmond district, and the euro zone sentiment indicator, both published at 16:00 p.m. Following Christine Lagarde's recent comments, EBC is likely to cut rates before summer, which puts the euro in a strategically weaker position against the dollar, given that the ECB started raising rates much later and he will probably cut them head to head with the Fed. Ultimately, interest rates in Europe are also lower than in the US, and the condition of the economy is still incomparably weaker.

This leads us to the conclusion that the soft landing expected by Goldman Sachs analysts does not necessarily mean the 'twilight of the dollar's dominance' in an environment of falling yields.

The zloty is in a favorable position

Against this background, the Polish zloty seems to be in a slightly more favorable position both in relation to EUR and USD. MPC interest rates probably will be maintained at least until mid-year, although if subsequent macro readings are comparably 'weak' to yesterday's retail sales data, one, small reduction between February and June may seem justified.

Still, even if inflation reaches the target for a while, around 2,5%, real rates in Poland will amount to practically 3%. This is a very significant number, even compared to the US today, and especially compared to EUR. All this at a time when GDP growth is expected to accelerate significantly.

Also, persistent inflation risks and uncertainty regarding the second half of the year (VAT on food, unfreezing of energy price subsidies), which will coincide with the first rate cuts on both sides of the Atlantic, can support the zloty, as well as the potentially hawkish stance of the Monetary Policy Council. If we add approximately EUR 70 billion that Poland may receive from EU bodies, it seems that the strength of the zloty may remain a bit longer. The main threats to the Polish currency may potentially be: wider unexpected economic slowdown or a spike in oil prices, in the event of which capital would likely flow to the US dollar. Currently, the basic scenario seems to be that the Polish currency will remain strong, at least until the first rate cuts by the Monetary Policy Council, which, unlike the ECB, does not communicate its 'readiness' to start reducing rates.

Today we pay 4,0045 for the American dollar, 4,37 for the euro, 5,1059 for the British pound sterling, and 4,6222 for the Swiss franc.

Source: Eryk Szmyd, Financial Markets Analyst XTB