Exchange rates are sinking on the prospect of higher rates, the EUR/USD breaks through to 1.06, the EUR/PLN has found its balance (Daily analysis 23.02.2023)

The US dollar's rally against the main currencies continues, and the latest excuse for the USD to continue its rebound has been provided by the minutes of the February FOMC meeting. Nevertheless, the USD/PLN remains below 4.50 thanks to the improving condition of the Polish zloty. The euro exchange rate, after last week's jump towards 4.80 PLN, has found balance just below this ceiling.

Polish zloty: the EUR/PLN finds stability around 4.75

The euro exchange rate approached 4.80 PLN in the middle of the month, in nervous anticipation of the opinion of the CJEU Advocate General. Although the EUR/PLN breached the November highs then, the zloty quickly retreated from the lows, and the common currency's quotations found short-term stability in the vicinity of 4.75 PLN. Since the beginning of the week, the euro exchange rate has circulated in a narrow range and closed between 4.74 and 4.77 PLN. We see a high probability that the PLN market picture will stay the same in the near future. Given the weak sentiment on global markets and the growing risk aversion, a jump to 4.80 EUR/PLN is more likely than a drop to 4.70 in the short term. At the same time, we invariably expect that at the end of March, we will pay about 0.02 to 0.03 PLN less for the euro than now.

One piece of the market puzzle that has worked against the zloty in recent weeks is the correction in the dollar market. At the beginning of February, the EUR/USD exchange rate broke its several-month-long climb and collapsed from around 1.10. However, after the first dynamic movement of a few days, the dollar's quotations got stuck. The USD retains strength, but further appreciation has been slow. Suffice it to say that the EUR/USD has only slipped by about 0.5% since the 7 February lows. Despite this, the 1.06 ceiling was reached yesterday and the quotations slid to their lowest since 6 January. Conotoxia's USD exchange rate forecasts assume that the dollar may still have a slight room to continue its (recently slow) rebound.

US dollar: the USD rebound maintains a corrective nature

We expect the EUR/USD to be in around 1.05 at the end of March. It is worth adding that only if this very important barrier is pushed through would it mean a break in the negative trend for the dollar, and we do not foresee such a development on the currency market. We see a risk that the USD/PLN will temporarily rise above 4.50, but in the later part of the year the dollar exchange rate should take the direction towards 4.0 PLN and thus return to the downward trend, which was initiated in the autumn of 2022. The current reshuffling to which exchange rates are subject to is the result of rising interest rate expectations in the main economies in. This trend is the strongest for the US, which favours the USD.

At the very beginning of February, the dollar was losing ground after the Fed meeting. Yesterday, after the release of the minutes from the FOMC meeting, the USD gained, probably based on a passage stating that a larger-than-expected number of policymakers opted for a repeat of December's half-percentage point rate move. In fact, the attitude of Federal Reserve officials remains unchanged, but investors stopped pushing past declarations of the need for further tightening when data from the economy improved. This shows how much attitudes have changed towards the dollar, which was previously pushed into a deep defensive position. With three rate hikes fully priced in by a total of 75 basis points lifting the Fed rate to a range of 5.25-5.50% by the end of the cycle, any positive impact of the monetary policy expectations may be already be running out of steam.