What about the euro? Inflation is already very close to the target

The EUR/USD pair has been in consolidation looking at the first two weeks of this year. EUR/USD cannot break either the 1,10 or 1,09 level. It seems that another trigger for the pair may be the possible exclusion of an interest rate cut in the first half of this year. Will such a signal be sent by the ECB or the Fed? Or maybe through both banks? What does the zloty look like in all this in the perspective of no reductions in the coming months?

When will interest rates be cut?

Since the beginning of this week, we have heard many statements from central bankers European Central Bank. Some of these statements are mutually exclusive, but they all clearly indicate that interest rates will not be reduced quickly. The market fully estimates the first cut in April, but if anyone talks about cuts, it will be in the second half of the year. Philip Lane, the ECB's chief economist, indicated that by mid-year the decision-making committee will have enough data to decide whether there will be interest rate cuts this year. Nagel rules out cuts in the first half, but says yes there is a chance for this later. Villeroy says that discounts will definitely appear this year, but it is too early to make such a decision.

However, Holzmann from the ECB, who is also the head of the Austrian central bank, is skeptical. He points to high probability of keeping interest rates unchanged until the end of this year. Although inflation in the euro zone is already very close to the target, it must be remembered that there are prospects for recovery, as was the case in Germany in December. CPI inflation in Germany it ultimately amounted to 3,7% y/y in December, although in November it was 3,2% y/y. In the euro zone itself, inflation also rebounded from 2,4% y/y in November to 2,9% y/y in December. It is clear that inflation has not had its last word yet, although looking at positive real interest rates, a reduction in interest rates should appear at some point.

NBP may follow the ECB's lead

At the same time, the March deadline seems too early, looking at the US and the Fed. This is why denying the scenario of a cut in March, even with the ECB's current communication of no cut in the first half of the year, may lead to the dollar will show its strength in the near future. Of course, such a scenario could be easily averted by the publication of a series of weak data from the US. However, hard economic data from this country do not want to deteriorate, while the euro zone is still struggling with many problems.

The weakness of the euro is, of course, not good news from the perspective of the Polish zloty. This is visible in the courses themselves. Since the beginning of this year, EUR/PLN has increased by approximately 1%, while USD/PLN by almost 2%, even with a very stable EUR/USD pair. Of course, the zloty should not experience a very large sell-off, taking into account the attitude of the NBP, which theoretically may follow the ECB's lead in terms of subsequent decisions on the level of interest rates.

Just before 09:00 we were paying PLN 4,3805 for the euro, PLN 4,0103 for the dollar, PLN 5,0840 for the pound, PLN 4,6700 for the franc.

Source: Michał Stajniak CFA, XTB