US dollar exchange rate jumps sharply after Powell report, Polish zloty is dependent on the content of the NBP inflation projection (Daily analysis 8.03.2023)

Positive sentiment burst like a soap bubble after the Fed chief's report to Congress, with Jerome Powell sharply tightening his tone. The result was a sell-off in equities, a repricing of bonds and a rally in the dollar, which became the strongest against the main currencies in more than three months. The EUR/PLN remains stable and is stuck around 4.70 in anticipation of the outcome of today's Monetary Policy Council meeting. Rates will remain unchanged at 6.75%, but the key to the zloty's behaviour will be the conclusions of the NBP's new inflation projection.

The US dollar: EUR/USD collapses after Powell report

If needed, the Federal Reserve may return to the increases of more than 25 basis points that were abandoned at the end of last year. The targeted level of the cost of money that will be reached in the nearly year-long cycle is higher than FOMC members had assumed as recently as December. These two statements from the Fed chief's two-day report to Congress, which began on Tuesday, gave the dollar a boost. The downward correction in the EUR/USD was wobbling in its tracks as recently as yesterday morning when the rate approached 1.07. A day later, the dollar against the main currencies is already at its strongest since the end of November last year and is once again holding the cards on the currency market.

The EUR/USD, however, is just a hair above the key zone of around 1.05. Only if this is pushed through would it increase the likelihood that the USD's rebound from last weeks correction could turn into a more sustained and stronger trend. In fact, the data will be decisive. At the moment, the market sees a greater than 60% chance that the Fed will raise rates by half a percentage point from the current range of 4.75-5.00% in a fortnight's time. That's a high-expectations bar that will be easy to knock down. The week's main talking point will be Friday's US labour market report, which has been in fine form at the start of the year. On Tuesday, 14 March, in turn, the very important inflation readings will be published.

The Polish zloty: EUR/PLN awaits MPC meeting near 4.70

This year's Monetary Policy Council meetings did not generate much excitement. This time, although interest rates will again remain unchanged, things are far different. Interest rates in Poland have remained at their highest level in over two decades at 6.75% since September last year. More months are passing, but the cycle of increases that began in October 2021 has still not been officially completed, it only stopped. Whether this will happen today will be determined by the content of the National Bank of Poland's inflation projection.

The monetary authorities will make their decision knowing the assumptions of the eagerly awaited inflation projection. If it continues to indicate a rapid easing of price pressures, this will favour an official announcement of the end of the cycle and a wider opening of the gate for interest rate cuts towards the end of the year. If this were to happen, domestic monetary policy would again flow against the tide of global trends, which could adversely affect the zloty. The timing when major central banks are tightening is not a good time to announce the end of rate hikes. With no prospects of unblocking financing for the National Reconstruction Plan and after the CJEU Advocate General's opinion unfavourable to the banking sector, the Polish currency may be particularly vulnerable at the end of the quarter.