Currency exchange rates without significant fluctuations, zloty stronger at the end of the quarter (Daily analysis 31.03.2022)

The end of the quarter is not favourable for investors' activity. The same is true of waiting for new information and leaks concerning the chances of a ceasefire. On the other hand, market sentiment is positively influenced by the USA's release of another part of its strategic oil reserves. As a result, the price of a barrel of brent in London again tries to break through 110 USD. The raw material is still about 40% more expensive than at the beginning of this year.

Polish zloty: an optimistic end to the quarter justifies falling currency exchange rates forecasts

The euro exchange rate is heading towards the close of an extremely turbulent quarter at around 4.65 PLN. The jump in strengthening from Tuesday is not continuing due to the lack of official confirmation that the Russia-Ukraine peace talks will bring a ceasefire. At the moment, the euro costs 0.35 PLN less than at the peak of the panic in the first part of the month. The EUR/PLN is only just over 1% higher than on the eve of the Ukrainian invasion.

We expect that the Polish currency will remain on the upward path in the second quarter, and the exchange rate of the common currency will return to this year's lows, i.e. PLN 4.50. This is supported by the prospect of further increases in interest rates, which increases the attractiveness of the zloty. The exchange of government currency funds on the market will also be favourable. We also expect the Polish National Recovery Plan to be unblocked. The external environment may be quite favourable; we definitely do not expect a slump on world stock markets.

Euro: German inflation sets records

Inflation in Germany accelerated to 7.3%. The price dynamics in Europe's largest economy is the highest in over forty years. The figures came in above forecasts mainly due to energy, which was almost 40% more expensive than a year earlier. At the same time, price pressure is spreading across all categories, and core inflation rose from 3.0 to 3.3% year-on-year. On Friday, data for the euro area as a whole will be published - a reading close to 8% is in the air. Also, tomorrow, the preliminary CPI estimate for March will be released by the Polish Central Statistical Office (GUS), and the indicator will likely reach double-digit figures.

Getting back to the eurozone: everything indicates that inflation will be higher and more persistent than the European Central Bank's latest forecasts. This will force a change in the monetary authorities' strategy. The acceleration of interest rate rises should support the euro against the main currencies. Otherwise, the rise in the euro may be temporary. At present, it costs 1.1150 USD, while Conotoxia forecasts assume that the EUR/USD exchange rate will rise to 1.15 this year. This trend will play an important role in pushing the USD/PLN below the 4.00 barrier, which we expect.

At the moment, the euro is also benefiting from hopes of de-escalation because the economies of the Old Continent are more exposed to the effects of war. This was reflected in the very cautious attitude of the ECB at its previous meeting. To an extent, this has already been proven, i.e. post-invasion prices have risen sharply. This will translate, for example, into wage demands and inflation expectations. The damage to the economy is less certain. In this light, the faster the ceasefire is announced, the more eager central bankers should be to tighten rates, given the lower uncertainty.

US dollar: no sign of a weakening labour market

Last week, Fed members' series of public speeches reinforced the belief that the US interest rate hike cycle will intensify and accelerate. This means that investors expect rate moves of 50 bps at the next two meetings in May and June. All signs indicate that tomorrow's labour market data will not contribute to popping the expectations balloon. The employment change is expected to be close to 0.5 million jobs. If this scenario is confirmed, the number of people working in non-farm sectors will only be less than 2 million lower than at the pre-pandemic employment peak.

In addition to the official report of the Department of Labor, less important publications did not provide reasons for concern. The private company ADP estimates that 450,000 jobs were added in the private sector. The number of vacancies, which in February still exceeded 11 million, remains at a record level. The good health of a key area of the economy is not enough to support the dollar - for markets, and it is nothing new. The Fed's overvalued intentions are also not enough. The fact that the US will surpass the UK, Australia, Norway and catch up with Canada in tightening in a quarter may limit the pace of the dollar's retreat in the coming months. At the moment, its valuation is dictated primarily by news from Ukraine. As a defensive currency, it attracted capital for the first phase after the invasion. When investors are pricing out the waning geopolitical risks, it is losing value.