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Currency markets turn from inflation to growth prospects (Daily analysis 25.07.2022)

The rate hike by the Fed, Poland's July inflation data and the pace of the recovery of natural gas stocks in Europe will be in the spotlight for investors this week. The EUR/PLN exchange rate opens the week near the 4.74 level, which means that the EUR/PLN is beginning to erode the spring peak zone between 4.72 and 4.75. Breaking through it would open the door to a deeper correction of the zloty's July weakness. The dollar-euro exchange rate (currently 1.02) is stuck between parity and 2017 low, which could mark a significant barrier for the EUR/USD exchange rate.

Exchange rates more dependent on growth rather than inflation; source: Conotoxia

Financial markets are concentrating more and more strongly not on inflation but on decelerating economic growth. Fear of aggressive tightening by the Fed has been one of the main reasons for the zloty's troubles and turbulence in global markets. Therefore, the peak in inflation and easing of the stance by the Federal Reserve should prove to be a turning point. In the coming months, we see room for a slight strengthening of the zloty in relation to the euro. Conotoxia forecasts assume a return of the EUR/PLN to the area of 4.60 at the end of September, accompanied by a limited correction of the strength of the dollar and a rise in the EUR/USD towards 1.05. Of course, the fear of recession and the energy crisis in Europe will not be ideal conditions for emerging market currencies, and currency quotations may be choppy and subject to numerous turns. It also appears that at this point, after a clear retracement, the zloty may be at risk and exchange rates could be prone to a slight rise.

In the previous week, the European Central Bank started its tightening cycle with a stronger-than-expected 50 basis point hike. There will probably be no surprises for the Fed on Wednesday evening: a second consecutive move of 75 basis points is expected. It will be the fourth rate hike, pushing the cost of money to a range of 2.0-2.25%. This is above the European Central Bank's target range, and the US monetary authorities have not yet said their last word. Nevertheless, we believe that this will be the last such sharp move, and soon the markets will start to focus on analysing the chances that rates will be cut next year. The decelerating economic growth is becoming increasingly difficult to look at through the fingers.

Signals of a slowdown are coming from all corners of the world. Central bankers will find it increasingly difficult to stop focusing on inflation in favour of analysing the evidence of an increasingly evident downturn. In the eurozone, the latest PMI readings have performed very poorly, both in services and manufacturing. In the USA, the number of new jobless claims has been rising markedly for several weeks. In Poland, readings of industrial production and retail sales were disappointing. There are no illusions: there is a technical recession. Further economic developments will be critical to how strongly rates will rise in the US, eurozone and Poland in September. If we take into account that Friday's preliminary reading of Poland's inflation for July comes out at a similar ceiling to the index value in June (around 15.5 per cent year-on-year), it will be easy for markets to subscribe to recent more or less official suggestions that the cycle is at an end.

25 Jul 2022 9:00|Bartosz Sawicki

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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