Saturday, 15 March 2025
The ongoing geopolitical tensions in the Middle East have driven investors away from riskier assets, leading to a weakening of the Polish zloty (PLN). Analysts at Ebury, including Enrique Díaz-Alvarez, Matthew Ryan, Roman Ziruk, and Michał Jóźwiak, reported that the zloty depreciated by almost 1% against the euro (EUR) over the past week. However, despite the decline, the EUR/PLN exchange rate remains only slightly above 4.30.
The zloty’s downturn follows a difficult week for currencies across the region. Rising tensions in the Middle East caused a flight to safer assets, benefiting the U.S. dollar (USD) in particular. Ebury’s analysts noted that the strong performance of the USD was driven not only by geopolitical factors but also by a robust U.S. jobs report, which exceeded market expectations.
Key Factors Driving the Zloty’s Weakness:
1. Geopolitical concerns in the Middle East prompted investors to flee risky assets.
2. A stronger-than-expected U.S. non-farm payrolls (NFP) report bolstered the USD.
3. The combination of these factors put downward pressure on the zloty.
In addition to the Middle East tensions, the U.S. dollar strengthened against other G10 currencies, while the British pound (GBP) faced a slight decline after dovish comments from Bank of England Governor Andrew Bailey. Despite these movements, Latin American currencies, particularly the Mexican peso, benefited from rising oil prices and distance from the geopolitical unrest.
Focus on Inflation and Interest Rates
Looking ahead, inflation data will be closely watched. On Thursday (10.10), the U.S. Consumer Price Index (CPI) report for September will be released, which could influence the Federal Reserve’s decision on interest rates at its November meeting. Markets are currently expecting a 25 basis point (bp) rate cut, but the inflation report could sway expectations. Investors will also be monitoring eurozone retail sales and UK GDP data, though these are not expected to significantly impact markets.
Polish Zloty Struggles Amid Global Uncertainty
Last week proved challenging for emerging market currencies, including the zloty. The Polish currency fared worse than most, except for the Hungarian forint and South Korean won. External factors, particularly the risk-averse sentiment due to the Middle East crisis and shifts in U.S. interest rate expectations, have been key contributors to the zloty’s weakness. Despite this, the EUR/PLN exchange rate remains relatively stable at just over 4.30.
Domestically, the National Bank of Poland (NBP) held interest rates steady. NBP President Adam Glapiński’s press conference, following the decision, took on a more dovish tone, even as inflation rose to 4.9% in September. Analysts suggest the central bank may lean towards a rate cut in the coming months, though significant uncertainty remains.
Eurozone and U.S. Economies Show Diverging Paths
The eurozone saw another low inflation reading last week, reinforcing expectations that the European Central Bank (ECB) may cut rates at its next meeting on October 17. Markets are anticipating a series of rate cuts through 2025, though analysts caution that further deterioration in economic activity could speed up the pace of easing.
In contrast, the U.S. economy appears to be on a stronger footing. The September NFP report exceeded expectations in terms of job growth, wage increases, and lower unemployment, boosting confidence that the Federal Reserve may achieve a “soft landing” for the economy, reducing inflation without triggering a recession. This scenario has strengthened the dollar and raised the likelihood of a gradual loosening of monetary policy.
British Pound Faces Temporary Setback
The British pound’s two-year appreciation slowed last week after Bank of England Governor Andrew Bailey suggested that the central bank might cut interest rates more aggressively if inflation continues to decline. Although this caused a temporary dip in the pound, analysts believe Bailey’s comments were more of a warning than a signal of immediate action.
Despite the short-term decline, the pound remains the best-performing G10 currency of the year. August GDP data, due on Friday (11.10), is expected to show that demand in the UK remains relatively resilient compared to the eurozone, which could help the pound recover unless overshadowed by developments in the Middle East.
As geopolitical tensions and economic data continue to unfold, currencies, particularly in emerging markets, remain vulnerable to shifts in investor sentiment. The zloty’s performance, along with other currencies, will likely hinge on the evolving global landscape.
Source: Ebury and ISBnews
