Higher yields in the USA and a strong dollar drive the market


The Polish Zloty suffered marginally from the worsening of global risk sentiment. Last week, it performed worse than other regional currencies, but found support on Monday. The question is, for how long? Significant for the Zloty this week will be the decision of the Monetary Policy Council (RPP) and bank messages on Wednesday and Thursday.

The trend of increasing yields of US bonds and the US dollar rate did not slow down last week. However, Friday’s unequivocally positive data on inflation in the US and the Eurozone partly reversed this trend and revived the hope that the recent interest rate hikes in these economies and lows in European currencies are behind us. Raw materials also experienced a sharp fall on Friday, which resulted in the best performing currencies of the year – the Brazilian Real and the Colombian Peso – ending the week near the bottom of the ranking.

This week’s focus is on the American labour market. The NFP report for September on Friday (06.10) will be the most important, but investors will also be awaiting the JOLTs report on Tuesday (03.10) and weekly data on unemployment claims. The state of the European economy will gain insight from the reading of retail sales in August (Wednesday 04.10), however, these will be highly retrospective data. Additionally, this week will be filled with several speeches from representatives of the European Central Bank and the FED.

The Zloty performed worse than other regional currencies last week but its sell-off was limited, finding support on Monday 02.10. The Polish currency was influenced by global sentiment – the behaviour of the dollar and yields of US bonds were key for the Zloty.

However, domestic news was also important. Attention last week was focused on the preliminary reading of September’s CPI, according to which, price dynamics experienced a significant drop from 10.1% to 8.2%. This was the first single-digit reading since February of last year and the fall was stronger than expected. Although some factors causing the reduction in price inflation are the result of legal regulations, and part seems temporary, the data could encourage NBP to further interest rate cuts in the near future.

Before the publication of the inflation report, the most likely outcome of the RPP meeting on Wednesday (04.10) seemed to be holding interest rates steady or lowering them by 25 basis points – currently, a move downwards of 25-50 basis points is seen as a more realistic scenario. Besides the decision itself, RPP’s messages on Wednesday and Thursday will be crucial for the Zloty, especially if the extent of the move is unusual. The upcoming parliamentary elections, in two weeks, add more intrigue to the meeting.

The preliminary reading of September’s HICP inflation rate, without a doubt, can make EBC optimistic. Both the main (4.3%) and the base (4.5%) inflation measures significantly fell – much stronger than the markets expected. The deflationary trend has finally crossed the Atlantic and is clearly visible in Europe. The markets expect that EBC will no longer raise interest rates in this cycle, it remains to be seen how long they will be maintained at current levels.

The readings supported European bonds and the euro itself. We will not receive many notable news this week, thus euro trading will depend mostly on US publications, particularly, those related to labour market conditions.

Last week’s data on price dynamics was favourable for the Federal Reserve, much like in the Eurozone. Both the main and the base PCE index (the measure of price change preferred by the Fed) fell lower than expected in August. Before the report was published, bond yields rose to the highest level in 16 years and have since fallen slightly. The markets are not convinced that there will be further interest rate hikes in this cycle, so the attention, in the context of the US dollar, will return to macroeconomic readings, specifically inflation and employment. The most crucial reading this week will be the NFP (non-farm payrolls) report for September on Friday (06.10).

A significant upward revision of economic growth in the first quarter has lifted some of the gloom around the UK economy. Further positive revisions of historical data confirm that the UK’s GDP rose significantly above pre-pandemic levels (+1.8%), but like most European economies, it is still below the trend prior to 2019.

The pound has not experienced significant changes against key currencies – it is burdened by the dovishness of the Bank of England, but supported by a more positive tone of economic readings.

Authors: Enrique Diaz-Alvarez, Matthew Ryan, Roman Ziruk, Itsaso Apezteguia, Michał Jóźwiak – Ebury analysts.