The dollar exchange rate is not slowing down. EUR / USD pair at 1.038

This week is the next stage of the dollar rally. In relation to major currencies, the USD has been the strongest for over 20 years, and it has been the best for around 5 years compared to the euro. The EUR and USD parity is becoming more and more realistic. As a result, the dollar was pushed to 4.50 zlotys. On the other hand, EUR / PLN invariably hovers around 4.70. In the article you will learn, among other things:

The strength of the dollar among the major currencies is felt most acutely by the Norwegian krone

Taking into account the sharp sell-offs on the global stock exchanges, in which the black series has been performing continuously since the month of falling WIG20, the behavior of the zloty may be taken as a good omen for calmer times. The strength of the USD in the group of major currencies is felt most acutely by the Norwegian krone, which lost almost 3 percent to the zloty this week. However, its Czech namesake is subject to particularly dynamic reshuffling. The drama of personal changes in the Czech central bank ends with currency interventions and dynamic declines in EUR / CZK. Although this week it was mainly bloodshed on the global stock markets, the euro exchange rate is stable, and even approached the opening of the gate to the decline of EUR / PLN towards 4.60. Such a scenario would be made more realistic by the end of the week below 4.65. The area for EUR / PLN growth is still effectively closed by the zone around 4.72, which was set at the end of April after information about the suspension of gas supplies from Russia. The Polish currency could not be rescued by the approval of Adam Glapiński by the Sejm for a second term in the chair of the NBP president, which had been long awaited.
PLN compared to selected currencies in the last week;  source: Bloomberg
While the zloty remains in the fluctuation range of several grosze, the position of the Czech koruna was changing rapidly. The currency of our southern neighbors was damaged by the announcements of personal reshuffles in the Czech central bank, and the action was much faster than in the case of the NBP. In the eyes of investors, reshuffles are a flaw on the hawkish and independent image. The end of CZK’s weakness came even faster than we expected. The sell-off was slowed down by interventions at the central bank that pushed EUR / CZK by more than 2.5%. and below the 25.00 barrier. The situation is quite different with the dollar, the rate of which rose sharply and slowed down only around 4.50. This is the effect of the decline in EUR / USD on long-term lows. The main currency pair broke even 1.04. If its decline does not stop around 1.0350, which are already at hand, it will even be possible to achieve the euro and dollar parity. I am talking about a very strong trend and a situation when nothing foreshadows that the perception of the euro may quickly improve.
Dollar exchange rate: EUR / USD lowest in 5 years;  source: Bloomberg

The advantages of the USD against the common currency are invariably the incomparably more determined central bank that fights against inflation and the greater resistance of the economy to an energy shock. The subdued moods in the stock markets or the cryptocurrency crash with a simultaneous trend of decline in the value of treasury bonds are also important. If we say that in such situations cash is the king, then the dollar, which is the backbone of the financial system and the main currency of settlement, appears to be the prince. In the past, US monetary authorities prevented episodes of market turbulence from prolonging and eased the tone quickly. Years of lenient monetary policy and the flooding of the financial system with virtually unlimited liquidity favored the bull market and increases in the prices of non-financial assets, including real estate. At the moment, the priority is to fight inflation, which means that the market downturn can be viewed positively, as the wealth effect may help prevent inflation in the US from slipping out of control. Speaking of it, let us add that its weaker than expected deceleration was the catalyst for the latest edition of the US currency rally. In Poland, consumer inflation in April amounted to 12.4 percent. Every year. This means that the Central Statistical Office revised its preliminary estimate by 0.1 percentage point. In March, the index rose to 11.0 percent. Prices have jumped by 2 percent. compared to the previous month. Their dynamic growth is invariably mainly due to energy carriers for the food company. However, base prices, excluding these two categories, were over 7.5 percent. higher than the year before. The prices of services were exactly 10 percent. higher than the year before. As a result, the consumer index in Poland has been at its highest since the end of the 1990s, and core inflation at that age was not that high. And the price pressure has not yet said the last word. The CPI dynamics in the middle of the year should amount to approx. 14%. Throughout the year, the value of the index will reach double-digit values.
Inflation in Poland, dynamics of base and consumer prices;  source: Bloomberg
With the fast-paced economy (in the first quarter, GDP growth was around 8% year on year) and a hot labor market, the current price trends require further monetary tightening by the Monetary Policy Council. Interest rates will rise as long as it is not certain that the peak of inflation is behind us and that price dynamics will start to decline gradually. This should happen over the next few months. Hikes in June and July are practically a foregone conclusion, and a move in September is very likely and will depend to a large extent on the strength of the inevitable slowdown of the economic situation. After the NBP governor’s press conference in May, it should be assumed that hikes by 100 basis points will not be repeated. We expect the cycle to end at 7-7.5 percent. and rates at this level will be maintained for a minimum of several quarters. Invariably, the risks lie with the higher rates and the need to keep them high for a long time. The widening difference in the level of interest rates in relation to the main rates on paper should be an advantage of the zloty. In the uncertain market environment and enormous risk aversion, however, capital does not make trips to the world of emerging markets. After the moods stabilize, the euro exchange rate should continue to slide to lower levels. A threat to such a scenario would be a situation in which the market would lose faith that inflation in Poland could be brought under control.
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