The beginning of the week may be full of interesting events on the currency market due to the decisions of central banks concerning interest rates and the monetary policy.
We are talking about the decision of the Polish Monetary Policy Council on Wednesday and the decision of the European Central Bank on Thursday. According to the market consensus, the MPC will raise the reference rate by 0.75 percentage points, to 6%. Based on FRA contracts, however, this is not yet the end of the cycle. These contracts seem to indicate that the reference rate will increase to 7.5% by the end of the year. The space for further interest rate increases in Poland may still be open, as the inflation peak may not occur until after summer. Thus, the divergence between interest rates in Poland and, for example, in the eurozone, may still be significant, which in turn may have a more positive impact on zloty quotations in the long term.
Moving on to the European Central Bank's decision, investors are preparing for its announcement, as it is expected to set the tone for next month's interest rate hike. The central bank will probably announce the end of its large-scale asset purchase program and confirm plans to raise interest rates in July, as inflation in the euro area shows no signs of slowing down, reaching a new record high of 8.1 percent in May. Investors estimate that ECB interest rates will rise by 130 basis points by the end of this year. They also give a 30 percent chance of raising rates by an additional 25 basis points in July, above the 25 basis points already fully priced in. This builds expectations for a 50 basis point hike in July.
The European Central Bank last changed interest rate levels in September 2019, setting a record low for the deposit rate at -0.5 percent. In contrast, the last time the ECB raised interest rates was in July 2011. That was when the deposit rate reached its local maximum at 0.75 percent.
The EUR/USD pair rate seems to be defending against dips below the 1.0350 level, which last occurred in 2016. It seems that currently in the United States, the market has fewer arguments for further rate hike pricing than in Euro land. This, in turn, may support the euro, which has been one of the weakest currencies in recent months. Since the beginning of the year, the common currency against the U.S. dollar has lost about 5.6 percent.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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