The Polish złoty came within a hair’s breadth of a major sell-off last week, but ultimately managed to recover its losses. The EUR/PLN exchange rate approached the crucial resistance level of 4.30, yet failed to break through it decisively, thanks primarily to a weakening US dollar against major global currencies, including the euro.
Economists at Bank Pekao observed that the złoty “stood over the abyss” but pulled back just in time. At the start of the previous week, the EUR/PLN pair touched the important resistance zone around 4.30 per euro, but could not sustain the move. The key factor was the dollar’s slide against the euro and other major currencies.
This episode highlighted the złoty’s sensitivity not only to USD valuations but also to shifting expectations about interest rates. According to Pekao analysts, the dollar has been weakening due to factors originating in the United States – the high correlation with short-term US Treasury yields and spreads versus the rest of the G-7 appears to confirm this trend.
A shift in rate expectations
The past few weeks brought another significant change in Polish markets: the pricing of further rate hikes has completely disappeared from the curve and has been replaced by expectations of cuts. The effect has been striking. The first part of the IRS curve is now below 4%, and all benchmarks of the domestic interest rate market are close to levels seen before the outbreak of the war in the Gulf. Within a month, spreads versus US and German 10-year bond yields narrowed by 35 and 60 basis points, respectively. – It is no wonder then that the złoty is weaker. The removal of expectations for monetary tightening in Poland has not helped it – wrote the economists.
Outlook for the złoty
Analysts from ING believe that as long as the latest Inflation Projection and Thursday’s speech by NBP President Adam Glapiński do not fuel expectations of rate cuts still this year, the EUR/PLN should trade below 4.30, likely in the 4.28–4.30 range.
On Monday around 12:00, the euro was trading at 4.28 złoty, and the dollar at 3.75 złoty. The resilience of the Polish currency will continue to depend on global dollar dynamics and domestic monetary policy signals.
Źródło: WNP.PL, Fot. Shutterstock/Jagoda_Mazurek
