Market summary according to AFORTI: MPC decisions, parliamentary elections and the situation in the Middle East
The previous week was mainly about waiting for the decision of the Monetary Policy Council in Poland. Despite the consensus among economists that further reductions in interest rates are economically and macro-market unjustified, taking into account the quite unpredictable movements of the Monetary Policy Council/NBP, the market consensus indicated a 25-50 basis point reduction. It should be emphasized, however, that these expectations were strictly related to the elections and the inclusion of the President of the NBP in the narrative supporting the ruling party.
Taking into account that the market was recently surprised by a 75-point reduction, a small part of market analysts risked the thesis that we will see a repeat or even a 100-point reduction - which would be explained by data provided by the Central Statistical Office - in terms of consumer inflation (CPI). However, the President of the NBP did not risk surprising the market again, focusing rather on a critical verbal message towards market economists.
What does the current inflation reading of 8.2% mean? First of all, we need to look at the factors that had a significant impact on the decline from the previous value of 10.1%. Undoubtedly fuel for such. For the last 2-3 weeks, we have been observing fuel prices at stations, which differ significantly from market realities. It is therefore difficult not to have some doubts whether the indicator calculated by the Central Statistical Office is based on correct premises. In our opinion, with fuel prices remaining high on international markets, the inflation level is closer to 9.3-9.4% than announced. We must bear in mind that the election period is a time when the economy is subjected to political pressure. So how should we interpret the words of the President of the National Bank of Poland about creeping inflation and its rapid decline? It is worth taking a closer look at Orlen's results after September/October. We do not expect a high dynamics of profits when, despite low prices, prices were maintained at high levels. Therefore, inflation readings after further purchases of fuel at market prices may not necessarily be so optimistic.
It should also be noted that the start of the war between Palestine and Israel strongly destabilizes the situation in terms of oil prices, which have increased significantly due to fears of the conflict spreading to the region and the potential involvement of major powers in this dispute.
Looking at our currency market, we could observe the consistent strengthening of the Polish zloty against EUR and USD. The EUR/PLN resistance levels around 4.6800 effectively gave resistance and the zloty returned to the EUR/PLN 4.6200 area. Several attempts to break the 4.6000 support failed just before the MPC decision. In our opinion, this was partly due to the presence of the National Bank of Poland on the currency market and the use of high exchange rates. The markets, not being surprised by the relatively small reduction in interest rates, reacted quite calmly - following the trend of strengthening our currency. In the pre-election week, we do not expect a sudden strengthening of the PLN, although the previous presence of the NBP on the currency market several times may suggest that there may be an attempt to correct the value of the zloty and bring it down to the area of EUR/PLN 4.5000-4.5200. We will find out in the next 3-4 days whether this scenario has any chance of success. In our opinion, this is a realistic scenario.
On the USD/PLN pair, we also observed an increase in the strength of our currency. From the resistance level of 4.4000, through the area of 4.3600. It seemed that this level would remain quite stable - however, surprisingly good news from the American labor market caused the dollar to quickly drop by another 4 cents against our currency, reaching USD/PLN 4.3200. The data that surprised analysts meant that Friday resulted in a real boom for the EUR/USD pair. After a short correction attempt, we are back to Friday's levels.
The question remains how the most important Central Banks will behave in the near future. Their decisions, which focus on the fight against inflation and its effective taming, attract attention. Even though the Fed has recently refrained from raising rates, there are voices that an upward change of 25 basis points would not surprise the market. When the ECB, satisfied with the decreasing inflation in the EURO zone, ended the cycle of increases, raising USD rates could result in a further move south - towards EUR/USD 1.0400. Interestingly, there has been little talk lately about the Bank of Japan, which is the only one that does not change negative interest rates. This translates into the weakness of the Yen, which loses and consolidates around USD/JPY 150 (yen per US dollar).
This week in the context of USD, we will mainly wait for the publication of September inflation data from the USA. Data to be released on Thursday. The data should not surprise and M/M inflation of 0.3% and Y/Y of 4.1% should not result in high volatility on EUR/USD, but the latest reading of data from the labor market makes it worth taking a closer look at these data. In our opinion, the EUR/USD level of 1.0600 should not be exceeded this week, or rather we can count on slight declines.
Szymon Jańczak
Director of the Treasury Department
AFORTI Exchange
S.A.