Currency exchange rates react to the Fed, EUR/PLN near 4.65, USD plunges (Daily analysis 5.05.2022)

The Federal Reserve's first rate hike in 22 years by 50 basis points was insufficient to sustain the dollar's rally; the relatively soft stance compared to expectations resulted in a retreat from the dollar. Sentiment on equity markets improved markedly: S&P500 rose by almost 3% yesterday, recording its best session in nearly two years. The zloty also benefits: the euro exchange rate is falling towards 4.65 PLN, and the USD/PLN rate dropped below 4.40. The Polish Monetary Policy Council can guarantee further declines in exchange rates. After today's meeting, we expect the MPC to raise interest rates from 4.5% to 5.5%, with a clearly hawkish stance favouring the currency.

Polish zloty: MPC meeting provides further stimulus for appreciation

The euro exchange rate has fully erased last week's dynamic growth, which was catalysed by the news of the suspension of Russian gas supplies to Poland. Today's Polish Monetary Policy Council meeting should be a stimulus for a return below 4.65 PLN and a sort of opening of the EUR/PLN gate to 4.60 PLN. After all, better global investment sentiment accompanying the weakening dollar and supportive local factors are coming together at the same time.

In April, the MPC surprised by raising interest rates by 100 basis points. In May, the same step of raising the cost of money to 5.5% will no longer surprise anyone. This will be the eighth increase in the tightening cycle that has been in place since October. The last time interest rates were higher was during the Global Financial Crisis in 2008. A month ago, NBP President Adam Glapinski announced that economic developments would determine the scale of further rate rises, and the cycle has no predetermined target level. Since then, there have been at least a few indications for another aggressive move.

This year the Monetary Policy Council has changed its perception of the zloty's role and turned 180 degrees. Its strengthening is intended to help fight inflation, especially where interest rates are powerless. The zloty's condition should have an impact on the MPC's decision. A sharp increase and the so-called hawkish communication from the monetary authorities should help the Polish currency regain its resonance. We expect that EUR/PLN will still drop towards 4.50 this quarter.

US dollar: a sharp increase served with a mild sauce

Growing and increasing expectations about the scale of tightening that the Federal Reserve will serve up in the coming months have fuelled appetite for the dollar for weeks and cooled sentiment on global equity markets. The FOMC decided to raise interest rates by 50 basis points for the first time in the 21st century. The Fed also announced details of the start of a reduction in the total balance sheet, which has been bloated from around 4 to over 9 trillion USD in response to the pandemic crisis. However, this is not enough to meet the highly elevated bar of expectations.

First of all, Jerome Powell, the head of the Fed, distanced himself from the idea of a 75-basis-point rate hike, which was being promoted by some policymakers. This is in line with Conotoxia forecasts assuming that, similarly to May, rates will be raised by 0.5 percentage points during the next two meetings. The so-called quantitative tightening process will not start in May but only in June. It will initially proceed at a pace of 47.5 billion USD, which will be doubled in three months. The dollar is losing ground in response: the EUR/USD rose above 1.06, pushing the USD/PLN below 4.40. However, a more favourable outlook for the euro is needed to turn the dollar's weakening into a more lasting trend. Although the recent series of rather hawkish statements by European central bankers have been trivialised, the ECB's acceleration of normalisation may become an important investment motive once the balloon of expectations for the scale of rate hikes that the Fed is preparing for bursts.