The volatility of the zloty last week was exceptionally high. Initially, after the meeting of the Monetary Policy Council and the press conference of President Glapiński, he experienced an appreciation and the EUR / PLN exchange rate dropped to 4.48, but later increased by about 0.10 due to the growing concerns about the tension between Russia and Ukraine. If fears come true, the zloty is likely to come under more pressure, believes Ebury analysts: Enrique Diaz-Alvarez, Matthew Ryan, Roman Ziruk and Itsaso Apezteguia.
Strong volatility returned to the market. The beginning of 2022 brings a series of macroeconomic and geopolitical shocks. The January inflation report in the US caused another shock to investors, showing the value of 7.5% – the highest level in 40 years and noticeably above the already high expectations. At the news, debt markets around the world reacted with a sell-off. The impact on the FX market was less pronounced and the emerging market currencies performed well.
The inflation shock also appears to have been a high point for the Federal Reserve as well. James Bullard, one of the voting members of the FOMC, began to consider the possibility of raising interest rates even outside of the meeting schedule, something the Fed has not done in decades.
Late Friday news of a potential escalation in tensions around Ukraine only partially worsened sentiment in the markets. Of the G10 currencies, commodity currencies such as Australian, New Zealand and Canadian dollars have performed the best – markets fear that the conflict between Russia and Ukraine could drive up global commodity prices even further.
Beyond this topic, markets will focus almost exclusively on two factors in the foreseeable future: inflation readings and central bank policies. As for the first one, this week we will see the US PPI (Tuesday) and UK CPI (Wednesday) readings, and for the second – we will have a few speeches from the Federal Reserve and ECB officials. Additionally, minutes from the Fed meeting will be published on Wednesday (but it should be noted that they are released three weeks later).
PLN
The last days are for a golden rollercoaster. Initially, the currency strengthened thanks to the support of the actions and signals of the Monetary Policy Council and President Glapiński. The EUR / PLN exchange rate dropped to the lowest level since June 2021 of 4.48, only to raise about PLN 0.10 higher in the following days due to growing concerns about a possible Russian attack on Ukraine.
Currently, the market focuses mainly on the latter. Mixed signals mean that the EUR / PLN exchange rate, like other sensitive assets, remains in check. Ultimately, however, it also means that the market does not fully evaluate the risk of an escalation of the conflict: if there was a direct attack on Ukraine, the zloty would most likely come under greater pressure.
In the meantime, we will also observe news from the Polish economy, especially the January inflation reading, which will be released on Tuesday. Following the recent inflation surprises in other countries (including the Czech Republic and Romania), it seems that avoiding double-digit price dynamics may be difficult.
EUR
Continuous efforts by the president of the European Central Bank, Christine Lagarde, to counter market expectations of interest rate hikes, were mostly unsuccessful – they were only lowered by rising concerns around Ukraine on Friday evening. Currently, the markets expect increases by a total of 50 bp. in 2022, but at the same time with a target rate of only 0.7%. In our opinion, this is much too low given the inflationary pressure.
This week we will not get many news from the euro zone influencing the market. The focus will be on the leaders of the ECB’s dovish faction, namely President Christine Lagarde and Chief Economist Philip Lana, who will be speaking in public. Any indication that any of them are beginning to change their attitude in the face of high inflation would be beneficial to the euro.
USD
The January inflation report was another shock. Inflation rose to 7.5%, another record in 40 years. More worrying than the scale of price dynamics itself is that price increases are becoming commonplace. The spreading pressure on housing prices may be particularly worrying – this is a component where price increases rarely subside quickly.
Bond yields in the US increased significantly in the following days, but this movement was partially reversed after the inflow of information that the US believes that the Russian invasion of Ukraine may soon take place. We expect the January data to show a limited decline in producer inflation. More importantly, a lot of speeches from Federal Reserve officials are coming. We expect that they will confirm the growing concern about inflation and suggest to the markets that rates may rise at each meeting – by more than 25 bp. – unless inflation starts to decline soon.
Source: Ebury and ISBnews
