The zloty is waiting for the decision of the European Central Bank with hope

There has been a lot of hope in the markets since the publication of an article by the Wall Street Journal on Friday. Yesterday they were strengthened by the Bank of Canada, which raised interest rates for the sixth time, but less than expected.

Markets are now looking towards the ECB meeting. The interest rate in Canada increased by 50bp to 3,75%. This is the highest level since 2008 and higher than in the US, but market expectations were at + 75bp.

The Bank of Canada's decision breathes hope

The Bank of Canada does not announce the end of the cycle - in the comments there were suggestions of further increases in the face of persistent inflation, but growth forecasts have been thoroughly lowered and it should be assumed that this was the reason behind the decision on the lower than expected rate hike. It would seem that this is not good news for the markets, but remember that almost from the beginning of the year investors have been counting on a softer stance from the Fed and although they have been disappointed so far, the decision of the Bank of Canada is another symptom that maybe these hopes will finally be met.

In reaction to it, the Canadian dollar was depreciating, but the US dollar, in turn, began to depreciate against other currencies - incl. EURUSD rate returned above parity (lower gas and electricity prices in Europe as compared to the situation a few weeks ago are also helping).

Are the hopes of the markets premature? The WSJ article suggesting two hikes by the end of the year by a total of 125 bp (75 bp in November - the decision already on Wednesday and 50 bp in December) seems justified - the Fed has already significantly raised rates and will not raise them indefinitely. However, even if the rates increase to the range of 4,5-5% and the Fed simultaneously leads QT (which draws USD 95bn from the market per month), it will be a very restrictive policy (especially in the context of recent years).

Pending the decision of the ECB

Global trends, ie mainly pivot play and increases in EURUSD, helped the zloty a lot. The EURPLN rate returned to the inside of the upward range and yesterday it reached 4,71 for a while, while the dollar was below 4,70 for a while. However, one should not become overly euphoric. The trend on both pairs is still increasing, domestic factors unfortunately remain unfavorable and the pivot game is shaky.

The recent "successes" of EURUSD and the zloty will be held hostage today by the ECB's decision. The bank is to raise rates by 75bp, which will mean an increase in the deposit rate to 1,5%. Given that it has been negative over the years, this alone already signifies significant normalization, but markets are pricing in an increase in rates to 3% in the middle of next year. The key issue will be whether the ECB (directly or indirectly) subscribes to these expectations, as recently there has been a lot of talk about the Bank's model suggesting less need for rate hikes.

For EURUSD, which is trying to break the downward trend for the first time in months, it is an absolutely critical signal. The same is true for the zloty, which is a "passenger" of movements on the main currency pair. Decision at 14:15, conference at 14:45, and in the meantime (14:30) data on PCE inflation from the US. Today at 8:55 the euro costs 4,75 zlotys, the dollar is 4,72 zlotys, the franc is 4,78 zlotys and the pound is 5,48 zlotys.

Source: Dr. Przemysław Kwiecień, XTB