Polish zloty rebound: will data from the US and Germany change the trend? Analysis and forecasts

The zloty is trying to make up for losses after the last major sell-off, which could have been related to the deterioration of macroeconomic data both for Poland and for the European economy, especially Germany. In total, since the low of July 19, the dollar exchange rate has increased by over 5% to the highest level since July 6, and the euro exchange rate has increased since the beginning of August from around PLN 4,40 to PLN 4,48.

Recovery from US data: is this the beginning of a change?

Only yesterday's data from the United States allowed the zloty to catch its breath, which started to strengthen. As it turned out, not only is economic activity slowing down in Europe, pushing Germany deeper into recession, but it is also slowing down in the US, where, according to preliminary estimates, the S&P Global US Composite PMI fell in August 2023 to 50,4 points, failing to meet market expectations of 52,0 points.

US private sector: red flags

The latest reading pointed to the weakest increase in private sector activity since February, as the deepening contraction in the manufacturing sector was accompanied by a slower increase in output in the services sector. Total new orders fell for the first time in six months and job creation slowed to its lowest level in more than three years amid continued inflationary pressures and high interest rates. What's more, the backlog of work has shrunk at the fastest rate since May 2020. Meanwhile, input cost inflation accelerated due to higher fuel, wage and raw material costs, while selling price inflation declined. Finally, US companies were more optimistic in their production outlook for the year ahead, fueled by hopes of interest rate stabilization, increased customer demand and moderate price pressures.

Global bond yields: what does this mean for interest rates?

These data lowered bond yields in the world and could have led the market to price in the possibility of ending the cycle of interest rate hikes due to the deterioration of the macroeconomic situation. Thus, risky assets seemed to gain in value, including the Polish zloty.

Risk factors: exports, commodity prices and NBP policy

However, this does not change the fact that PLN may be under pressure from less and less competitive exports, which in the first half of the year was the backbone of Polish GDP, as well as from rising prices oil or gas in the global markets, which in turn may have a negative impact on the trade balance, which was mentioned in the previous commentary on the zloty. Not without significance may also be the increasing chance of interest rate cuts by NBP already in September. What's more, it will probably not be just one cut, but a whole series heading towards 5% at the end of 2024.

Hope for the zloty: a dovish message from Jackson Hole

What is the hope for PLN? Well, it is Jerome Powell's dovish message during Friday's Jackson Hole speech. If it turns out that the Fed is considering suspending further tightening of monetary policy, it may affect the weakness of the dollar and thus the return of risk appetite, including the zloty.