The zloty rebounded strongly on the back of the wave of risk appetite, and the euro eroded 4.50 zlotys. Another important level in EUR / PLN prices around 4.48, they close the way to 4.45. The trading ceiling may become 4.53 in the coming hours. It may be difficult to further strengthen the zloty directly in the current environment. First, the geopolitical situation is changing very dynamically. At the moment, enthusiasm prevails, but the psychological game continues, and managing tensions through diplomatic channels would be a waste of time – given the parties’ initial negotiating positions – very complicated.
Secondly, with the CJEU’s decision today on making the payment of EU funds dependent on compliance with the rule of law, the topic of conflict between the Polish government and the EU may return. Poland and Hungary’s complaint about this mechanism – according to prevailing comments – will be wholeheartedly dismissed. In Poland, the latest presidential draft of changes to the disciplinary chamber was (rightly) seen as a good omen, but breaking the deadlock and unblocking the funding of the National Reconstruction Plan ahead of the Hungarian parliamentary elections in April may not be achievable. Third, the threat of Russia invading Ukraine only temporarily has pushed the need for critical policy tightening by the Federal Reserve into the background, and this creates an environment unfavorable for risky assets and the emerging market world.
Prices of the US currency (similar to the Swiss franc) in recent days mainly reflected the dynamically changing assessment of the threat of a Russian invasion of Ukraine. However, the dollar has additional support that has already worked in the previous days. First, he stopped the opponent, and then preferred the gradual recovery of losses. These are, of course, expectations that the Fed will begin very aggressively to normalize monetary policy. “Water to the Factory” is another statement by FOMC members, as well as macroeconomic data pointing to a zigzag spiral of wages and prices in the US. The labor market is in much better shape than originally thought, and price pressure is not only accelerating, faster than expected, but is also spreading across the US economy. Last week’s high reading of consumer price dynamics is reflected in, among other things, yesterday’s information on producer prices and a similar scenario is expected after today’s import prices.
Investors will be looking for indications of whether the Fed is ready to start the cycle with a 50 basis point rate hike in March in the minutes of the January Fed meeting due out in the evening. Although it does not take into account the most recent data, the assessment should prevail that if before the standard reading of inflation (7.5% y/y) there are more and more voices indicating the need for a sharp reaction, then this belief can only intensify. The measure of the first move in our opinion remains an open question, but we are inclined to the fact that prices will rise by 25 basis points.
The zloty should be relatively resistant to Fed tightening. After a series of interest rate increases by the Monetary Policy Board, a specific cushion of safety has been created, which is also evidenced by the reaction to the recent turmoil and the immediate recovery of losses. Moreover, the market has already managed to absorb the intentions of the US monetary authorities. Expectations about the pace of tightening are increasing to a greater extent than the target level of interest rates, which will be achieved in 2-3 years. In other words: Investors believe that the Fed will start the cycle strong, but not that rates in the US will rise too sharply and for too long.
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