The zloty is the top-performing currency globally in quarter-to-date terms. Since the end of September, the PLN has gained 6.5 pct against the euro and 10 pct against the US dollar. The EUR/PLN rate dropped below 4.35 and is on the brink of returning to pre-pandemic levels. The Polish currency benefits from the post-election shift in perceptions of the future policy mix and expectations of Fed rate cuts, which are supporting risky currencies and assets.
The view that the Federal Reserve's tightening cycle is over and that interest rate cuts are imminent has led to a U-turn in market sentiment. A weaker US dollar, as well as a sharp equity and bond prices rally, create a benign environment for risky currencies and assets. Emerging markets are once again attracting investors, especially after the sharp sell-off in recent months. The zloty is seen as one of the eurozone's satellites. Given its high-beta relationship with the euro, the most recent temporary surge in EUR/USD to 1.10 played an essential part in the PLN's revival. There is, however, much more to the latest stellar performance of the Polish currency.
The zloty benefits from the post-election improvement of the perception of local fundamentals. The new policy mix favours equities and long-term bonds and triggers capital inflows. Investors cheer on repairing relations with the European Union and the fast unblocking of the EU funds. The new policy mix assumes loose fiscal policy in 2024 and a more prudent approach afterwards. At the same time, the attractiveness of the zloty is increasing as it has become clear that the Monetary Policy Council will, at most, modestly cut interest rates in the coming quarters. In the past, the National Bank of Poland's dovish stance weighed on the zloty, especially in September when a mammoth rate cut from 6.75 to 6.0 pct led to a severe PLN sell-off.
The latest impressive rally in the short-run may have exhausted room to extend gains and has led to a significant appreciation in real terms. Nonetheless, Conotoxia's medium-term outlook remains positive. We expect the zloty to trade firmer than the CZK or the HUF and see the EUR/PLN exchange rate declining to 4.25 in 2024. Polish real GDP has already returned to the pre-pandemic trend. The economy is set to expand by more than 2.5 pct next year, mainly on the back of a strong rebound in consumption driven by fiscal stimulus, hefty minimum wage hikes and a strong labour market.
Moreover, Poland has been one of the biggest beneficiaries of nearshoring globally. Efforts to fix the credibility of the institutional framework and improve relations with the EU may attract an even wider inflow of FDIs. Finally, the Ministry of Finance might opt to convert EU funds on the market, supporting the currency in the case of turmoil in the global financial system.