Volatility has subsided. The main EUR/USD currency pair continues to hover around the 1.13 mark. The rebound in stock markets and oil prices is picking up, hurting the Swiss franc.
The EUR/CHF is back above 1.04. This may prove that the market panic triggered by the discovery of a new variant of the coronavirus is beginning to calm down. The assessment that it will not be necessary to impose the draconian restrictions and limitations is starting to prevail. In such a scenario, investors may revert to a very aggressive valuation of the Federal Reserve's intentions, which should help the dollar regain its momentum and push emerging market currencies into trouble. Friday's inflation reading in the US could be water to the mill for these trends - price dynamics will take on new cyclical maximums, and the 7.0% year-on-year ceiling is realistic.
The zloty fully dependent on monetary policy
The Polish zloty rallied last week. It appreciated against the major currencies more than 2% to record one of the best weeks since 2009 and the Global Financial Crisis. The Polish currency might be prone to a corrective downturn due to the mentioned above global tendencies.
Before that, the zloty may be harmed by domestic factors as well. In our opinion, the Polish central bank will decide to raise interest rates by 75 bps to 2.0% at its Wednesday meeting. Adam Glapinski, the NBP President, warns against negative consequences of too rapid tightening (e.g. for the labour market). His statements may suggest that there is a risk that the decision will not meet the very high expectations of the financial markets. A less bold move in rates is possible and suggests a pause in the cycle. Decreases can exert a similar influence on the prices of energy commodities (e.g. oil in London is a dozen or so per cent cheaper than at the October peak), the announcement of the anti-inflation shield, or even the recent rapid strengthening of the zloty. In this case, the monetary policy may act as a double-edged sword and very quickly deprive the zloty of what it gave it at the turn of November and December.
Pound's painful déjà vu
The pound has been weak in the last two weeks. It has risen to 0.85 against the euro, mainly due to fading hopes of an interest rate hike at next week's (16 December) meeting of the Bank of England.
This trend is driven mainly by the stance of Micheal Saunders, a policymaker counted among the staunchest supporters of rapid normalisation. His call for a calm and thorough analysis of Omicron's impact on the economy's prospects ahead of the vote is being interpreted as a sign that the cycle may not begin until February. This is a kind of re-run of the play, as in November, the fate of a rate hike weighed on a knife-edge, and its absence hit the currency. Only in the background lies Brexit.
Firstly: there is a dispute over the so-called Northern Ireland Protocol, and relations between Brussels and London are strained. Secondly: the whole world is struggling with supply chains disrupted by a pandemic. It may turn out that these factors mask the negative impact of leaving the European Union, and the shortages of production components and other logistical problems in the case of the UK will be more permanent. Brexit will periodically create an unfavourable buzz for the pound, but it should not overshadow the fact that the Bank of England will follow a path towards significantly higher interest rates in the near term. Currently, the market is pricing in a 100bp rise in them over the coming year. As a result, we expect the pound to top against the euro in the coming months. We assume a fall in the EUR/GBP pair to 0.83 at the end of Q1 2022.