There is no war - the zloty has regained its strength

The zloty is strengthening in reaction to the decline in fears of Russia's aggression towards Ukraine. Polish currency returned to levels after the last "hawkish" press conference of the president National Bank of Polandand the continuation of interest rate increases again becomes the main factor shaping its quotation.

The zloty (still) is gaining in value

Wednesday morning brings a continuation of yesterday's zloty appreciation. In the morning you had to pay for the euro as much as PLN 4,4812, which is less than in the trough last Thursday and the least in 8 months. 

EUR / PLN daily chart. Source: Tickmill

The zloty has been strengthening since yesterday, returning to the levels observed just after last week's meeting of the Monetary Policy Council (MPC) and the press conference of the President of the National Bank of Poland (NBP) Adam Glapiński, on the wave of lower fear of Russia's aggression against Ukraine. 

Markets breathed a sigh of relief after the Russian Ministry of Defense announced the return of soldiers to their bases following military maneuvers. Investors decided that there would be no war, although the tense situation on the Ukrainian-Russian border would probably persist for many more months. 

It seems that after the last few days' episode of the war fear, it will not be so easy to scare the markets now. This means that investors' attention will shift to inflation and interest rate hikes again.

Inflation continues to create uncertainty

Yesterday the CSO released the latest inflation data in Poland. In January, inflation accelerated to 9,2%. Y / y from 8,6% in December and was the highest in two decades. The good news is that it turned out to be below the market consensus (9,3% y / y). However, this does not change the outlook on inflation. After the January summit, inflation will remain at high levels, to which the MPC will respond with large interest rate hikes. Therefore, the rate hike in March by 50 basis points (to 3,25%) and their further increase this year to a minimum of 4% remain the baseline scenario.

Interest rate increases and the pressure from the NBP to strengthen the zloty are currently the main factors supporting the appreciation of the Polish currency. The risk factors still include fears of Russia's attack on Ukraine, although now this factor is much less important than a few days ago. Another risk factor for the zloty is the potential cut-off of Poland from some European funds, to which today's judgment of the CJEU on the conditionality mechanism may be the first step. However, this risk is spread over time and can be ignored for the time being.