Ebury: There will be no change in the cost of money in the near future

The EUR/PLN exchange rate fell below 4.25 last week and after reaching the best position for over 4 years, the zloty returned part of the profits. In the near future, there will be no change in the cost of money - neither the MPC meeting on Wednesday nor the upcoming ones, Ebury analysts Enrique D'az-Alvarez, Matthew Ryan, Roman Ziruk, Itsaso Apezteguia, Eduardo Moutinho and Michał Jóźwiak assessed.

Below is the comment of Ebury:

This week, the interest rates in Poland will be decided by the MPC. However, we are focusing on the meeting of the European Central Bank - the ECB's interest rate cut is almost decided. The market is now awaiting announcements on further bank movements that will be crucial for the euro. Last week, the single currency, despite being surprised up in inflation in the euro area, has failed to strengthen itself.

Last week was very calm for the G10 currencies. Important from our perspective, the data readings were few, so G10 currencies were moving in the narrow ranges in which they were recently located.

We expect this and the next week to be the opposite of the last two. The month will start with a meeting of the ECB, the result of which will be announced on Thursday (06.06), then on Friday (07.06) the NFP (non-farm payrolls) report from the US labor market will be published, and at the beginning of next week - inflation. In addition, the markets will face the aftermath of the elections in South Africa, Mexico and India. In Poland, we are waiting for the outcome of the meeting of the Monetary Policy Council on Wednesday (05.06).

Of course, inflation readings from the US and the eurozone and the reactions of central bankers to them remain crucial. The relentless resulation of market expectations for significant interest rate cuts in 2024 is not beneficial for high-risk currencies, and in particular emerging market currencies.

PLN

The EUR/PLN exchange rate fell below 4.25 last week. However, after reaching the best position for more than four years, the currency returned some of the profits. Note last week, it focused on price dynamics. May CPI inflation was quite surprising - it increased only slightly, significantly below expectations, and placed itself in the middle of the NBP target range (2.5% x 1 pp.). The data also implies a further decrease in the base measure. The report is a pleasant surprise, but we do not think that it will significantly affect the rhetoric of the MPC, which will make a decision on interest rates on this Wednesday. No changes in the cost of money should be expected - neither at this meeting nor at the next.

We assume that during its press conference on Thursday (06.06), the President of the NBP Adam Glapiński will largely repeat the previously submitted messages, noting that despite the favorable surprise, inflation should continue to grow and risks are still present.

EUR

On this Thursday (06.06), the ECB will almost certainly cut interest rates by 25ps. There is almost complete agreement on the markets - in swap contracts, the immediate cut is priced almost fully. The timetable and the scale of possible further cuts remain crucial - expectations for both have been significantly rejected in recent weeks.

The last week’s price dynamics reading in May was higher than expected and it seems that the de-inflationary trend at least stopped. Particularly worrying is the rebound in the price pressure in the service sector, driven by rising labour costs and consumer demand. It is not known what ECB officials will decide in connection with these trends, Thursday’s press conference after the meeting may therefore be the most important event for the currency markets of this week.

USD USD

PCE’s April inflation, which is the Federal Reserve’s preferred measure, found out last week that was exactly as expected, and slightly lower than the previously published CPI report. This was enough to offset the weekly increase in U.S. bond yields, leading them to levels from the beginning of the week, which also contributed to mild downward traffic on the dollar. It ended May with a decline in relation to most major currencies (except the Japanese yen), as the overall stronger economic data from the world, in particular from Europe and China, improved risk sentiment, and the safe haven is losing.

This week should be much more interesting. The calendar is distinguished by the Friday NFP (non-farm payrolls) report. In addition to the number of new net jobs, markets will focus on a monthly wage increase to see if persistent service inflation translates into higher wage expectations for workers.

GBP

Despite the announcement of the date of the parliamentary elections, uncertain signs of cooling in the service sector (worse than expected PMI data) and the weakness of consumer spending visible in the latest retail sales report, the pound is doing surprisingly well. The British currency has been strengthening against the euro in recent months, with markets seeing most of the Labour Party as arguably the best option for the market in the upcoming elections - this reflects both the continuing problems caused by the poor minibuddeship of Liz Truss and a shift towards the political center under Keira Starmer's rule.

There will be few readings this week and it will be mainly survey data, not hard ones. In the face of the elections, 04.07 The Bank of England Monetary Policy Committee shall abstain from any communication (except the June meeting). This means that few national factors will be able to affect the pound, so trading will depend on most of the events in the world.

Source: Ebury and ISBnews