Strong golden. The market is playing for a large rate hike

The improvement in market sentiment and the expectation of a large interest rate hike in Poland strongly support the zloty today. The EUR / PLN exchange rate, which yesterday attacked the PLN 10 barrier, today is almost PLN 11 lower.

The zloty is recovering, the market is waiting for a decision on rates

On Tuesday, the zloty strongly gains versus the main currencies, catching up with very large recent losses. He is helped by the improvement in sentiment in global markets, after the fears of the negative economic consequences of Russia's aggression towards Ukraine have eased somewhat. Most of all, however, the zloty is supported by expectations for today's large interest rate hike by the Monetary Policy Council (MPC).

At noon, the euro, which hit PLN 5 yesterday, cost PLN 4,8913. In the morning the single currency was priced even lower, as the EUR / PLN rate fell to PLN 4,8657 and was lower than on Friday at the close. 

EUR / PLN daily chart. Source: Tickmill

The zloty was gaining equally strongly against the dollar and the Swiss franc. The USD / PLN rate fell to PLN 4,916 from levels above PLN 4,60 yesterday. The CHF / PLN quotations fell to PLN 4,8425. 

The zloty, similarly to the Hungarian forint and the Czech koruna, is strengthening today on the wave of improved sentiment in the financial markets. However, the fact that its appreciation is stronger than that of both currencies is due to the anticipation of the results of the ongoing meeting of the Monetary Policy Council. These will be published in the second half of the day. 

A rate hike by even 100 bp is expected

The market believes that Monday's jump in EUR / PLN to PLN 5 will be like the proverbial blanket for the MPC. It is expected that the Council will raise interest rates sharply to support the zloty and stop further inflation rise in Poland in the short term. 

The hike may reach even 100 basis points (the main rate would then increase to 3,75%), i.e. it will be twice as high as assumed until recently by the official market consensus (+50 basis points). Such a move or bigger, especially supported by the announcement of further rate hikes, will certainly further strengthen the zloty. An increase by 50 bp, in view of such high market expectations and strong zloty appreciation, would be negatively perceived by the market.

The MPC decision is not the only important domestic event that will absorb the attention of the currency market this week. The second such event is the president's press conference scheduled for Wednesday NBP Adam Glapiński. 

However, news from Ukraine remain the key factor for the performance of the Polish currency. Especially the optimistic ones. The emergence of chances to end the fighting and normalize the situation may even lead to an abrupt strengthening of the zloty, quickly bringing the quotations to the vicinity of PLN 4,60.