Poland's Political Situation Looks Zloty Negative — Market Talk

is consolidating as investors price up the next trade move, said ING.

So far, the European Union has refused to retaliate and hopes to negotiate its way out of the 30% tariffs imposed by United States President Donald Trump at the weekend. Failure to get that rate negotiated lower — prior expectations were that it could be negotiated down to 10% — would look negative for the region. However, it's going to be a "noisy" couple of weeks and the bank can't rule out the threat of even higher U.S. tariffs as Trump tries to get the deal over the line.

For Tuesday, U.S. consumer price index will be the main driver of , stated ING. But before that, investors will get an update on German ZEW investor expectations. These should come in on the strong side as investors focus on the medium-term benefits of German fiscal expansion. On the subject of fiscal policy, France is still dealing with large budget deficits and Prime Minister Francois Bayrou is due to unveil his fiscal consolidation plan on Tuesday, including 40 billion euros of spending cuts.

The bank will keep an eye on French government bonds, where failure to deliver spending cuts — for example, the United Kingdom recently) seems to take its toll on local fixed income and foreign exchange.

is sitting above modest support at 1.1650. The foreign exchange options market prices a 59 pip range on Tuesday. The bank will see whether June U.S. CPI can add a little momentum to this bull market correction.

In quiet markets, the run-up to 0.8700 has been notable, pointed out ING. This softness in sterling (GBP) hasn't been driven by the fiscal side. In fact, the 10-year Gilt-Bund spread has narrowed back into 187bps — the tightest since early April. It has been the narrowing in shorter-dated interest rate spreads that is weighing on sterling.

Here, the two-year EUR:GBP swap differential has narrowed back into 157bps as investors question whether the Bank of England will have to ease policy faster than once per quarter. On that subject, investors will hear from Bank of England Governor Andrew Bailey at 10 p.m. CET Tuesday as he delivers his annual Mansion House speech alongside Finance Minister Rachel Reeves. The bank expects Governor Andrew Bailey to reiterate a position — similar to the Federal Reserve — that faster easing is possible if the labor market deteriorates.

On this latter point, after Wednesday's release of June CPI, Thursday sees some important U.K. labor market data. Should the May payroll release of -109,0000 stay unrevised and should there be further payroll declines in June, U.K. rates and sterling could see another leg lower. ING's forecast preference had been for to grind towards 0.88 over the coming quarters. That could come a lot sooner if the labor market weakens.

The bank still sees a dovish case for Poland's zloty (PLN).

ING has been bearish on PLN since the July Polish central bank (NBP) meeting and the surprise rate cut. Although PLN has been underperforming the region in recent days, usually markets fade the move quickly and the PLN depreciation doesn't last too long. Still, since the last NBP meeting, the bank hasn't seen much of a local story and only the numbers from the economy and July inflation will be of more interest to the market.

ING still believes that dovish numbers will lead to more NBP rate cuts, more than the MPC now indicates and 50bps in September is on the table. Overall, markets should see constant pressure on PLN to weaken in the coming weeks and the bank still sees a target of 4.280-290 .

It wouldn't be a complete surprise to hear the White House threatening the European Union with broad 50% tariffs, with a comment such as "there is nothing they can do to avoid these tariffs," said ING.

Financial markets have learned, however, not to take these comments at face value and any dip on such a headline would likely meet buyers, wrote the bank in a note to clients.

As for the EU's negotiating position, reports suggest the bloc is split, pointed out ING. Apparently, Germany and countries within its auto supply chain network are looking for a quick deal to generate some certainty. On the other hand, France and Spain are said to prefer a tough negotiating stance and retaliatory measures.

Reports of a two-month extension for a deal to be made seem quite credible, too, stated the bank.

In terms of sectors, the EU is also trying to negotiate down 50% tariffs on steel and aluminium, 25% on cars and avoid a big tariff on the pharma sector, which would hit Ireland particularly hard. News on Friday that the United States is close to reaching a deal on pharma with Switzerland lifted healthcare stocks and could be a positive here.

It's hard to expect another big rally on this week's trade news, noted ING. There is an outside risk to the 1.1900/1910 area if the U.S. misjudges the mood and equities are marked heavily lower. But that seems unlikely.

The bank tends to favor consolidation in a 1.1700-1.1830 range this week, although again, ING would avoid trying to pick a top in .

The eurozone data calendar is also light this week. In terms of political news, this Friday's passage in the German upper house of nearly 50 billion euros in fiscal stimulus could be a reminder of the sea-change for domestic demand prospects in Europe — a multi-year positive, added the bank.

is staying relatively bid even as stress in the United Kingdom Gilt market abates. The fall-out from last week's U-turn on welfare reform is a broader understanding that taxes are going to have to go up in November, according to ING. The weaker sterling (GBP) story then switches from a sovereign risk premium story to a more conventional one of tighter fiscal and looser monetary policy.

Some slightly better U.K. monthly gross domestic product data this Friday could generate some sterling support, but the bank suspects 0.8600 now proves the near-term floor for .

Last week, investors saw an "earthquake" shake market expectations in Poland, and the zloty (PLN) will remain in the spotlight this week, said ING. The dovish turn of Poland's central bank continues to drive the market, and market expectations have moved to 3.50% for the priced terminal rate.

lags "significantly" with the movement in rates, and this week the bank expects this gap to close. The rate differential points to levels around 4.280-290. It will, however, take some time to get there, in ING's opinion.

Elsewhere, the bank remains bullish on the Czech koruna (CZK), while ING is neutral on the Hungarian forint (HUF), which it believes has rallied sufficiently for now. Of course, the focus will be mainly on the U.S. trade story and Wednesday's tariff deadlines.

In general, however, Central and Eastern European currencies shouldn't be the main ones exposed and the shield from a stronger EUR should protect the region from a possible risk-off sentiment, it added.

finally broke above the 1.163 area, but faces equally harsh resistance around 1.170, a crowded strike level for long-euro options, said ING.

The euro might have drawn marginal support from NATO agreeing on the 5% defence spending target and United States President Donald Trump sounding broadly conciliatory towards its allies (— with the exception of Spain), wrote the bank in a note.

But in practice, remains almost entirely a US dollar story, stated ING. The eurozone calendar is also quite light on Thursday, while European Central Bank's Christine Lagarde, Isabel Schnabel and Luis de Guindos are all scheduled to speak.

A clearing of the 1.170 level should set the sights on 1.20, although some further deterioration in U.S.-specific factors may well be necessary to get there, pointed out the bank.

Hungary's central bank (MNB) on Tuesday and the Czech central bank (CNB) on Wednesday both delivered a clear message that the bar for further rate cuts is very high, ING said. Next week, focus shifts to Poland, where investors could also see a hawkish tone, unlocking some more potential for the zloty (PLN).

Overall, the bank remains bullish on the Central and Eastern European (CEE) currencies. ING believes can test 400, supported by the hawkish MNB. In the Czech Republic, the bank sees at 24.700 with potential to go to 24.500 if ING's expectations of hot inflation numbers in June are met.

In Poland, ING lacks a driving factor at the moment, but it will see Poland's central bank (NBP) meeting next week, which could add momentum to lower.

The rally stalled again in the 1.160-1.165 area and it's plausible markets may require a more compelling macro story — most likely from the United States — rather than the mere unwinding of geopolitical risks for a break higher, said ING.

A lot of focus in Europe is on the ongoing NATO summit in the Netherlands, which U.S. President Donald Trump joined late Tuesday, wrote the bank in a note. Any signs that the U.S. safety guarantees for European allies are faltering further — or becoming even more transactional than expected — could sour sentiment in European markets. Especially after Spain's refusal to meet the 5% defense spending target has curbed any enthusiasm for a coordinated spending boost.

That said, remains predominantly a US dollar story, and the market's blatant dislike of the greenback — confirmed by limited gains during the Middle East turmoil — means the upside potential remains intact, stated ING.

Central and Eastern European (CEE) currencies reacted positively on Tuesday to the announced ceasefire in the Middle East. In USD-crosses, all three major currencies in the region gained at least 1.0% this week alone and the bank can now see some stabilisation with more attention to the local story.

Wednesday's calendar is quiet in the CEE region and attention will be on the Czech central bank (CNB) meeting. It should support the koruna (CZK) with a hawkish tone, reacting to the growing upside inflation risks, pointed out the bank.

Similarly, Tuesday's meeting of Hungary's central bank (MNB) was hawkish according to ING's expectations, which accelerated forint (HUF) gains.

In general, the bank remains bullish on the region, but the next few days should be calmer unless the geopolitical situation changes again. While HUF and CZK have room for further gains, Poland's zloty (PLN) may hit some limits. Tuesday's data brought another wave of PLN rate receivers, undermining the rate differential that made the bank bullish on the currency in previous days.

Overall, ING believes that may test 400 in the coming days thanks to MNB support, will be more limited on the downside at 4.250 levels.

The CNB will leave rates unchanged at 3.50% on Wednesday, in ING's view, in line with market expectations. The bank remains bullish on the CZK despite the rally over the past two days and it expects to head towards 24.70 on Wednesday.

ING said its view is that can probably correct a bit further from here on geopolitical risks.

The bank's near-term target is 1.140, and explorations below that level can be justified even without new big spikes in oil prices.

That said, geopolitical events tend to be temporary drivers for foreign exchange unless they trigger long-lasting effects on commodity prices — like the Russia-Ukraine war, stated ING. So, the bank still thinks there will be plenty of interest in buying the dips at the first signs of de-escalation.

Aside from speeches by European Central Bank President Christine Lagarde and other Governing Council members on Thursday, the eurozone calendar is empty.

The Bank of England will almost certainly keep rates on hold on Thursday, in line with consensus and market pricing, pointed out ING. There could be more than one dissenter voting for a cut, but the overall guidance should remain broadly unchanged, roughly endorsing market expectations for two more cuts by year-end.

The risks are, however, slightly on the dovish side given the recent slew of soft United Kingdom data, and ING remains bullish on in the near term.

If the conflict escalates and keeps impacting energy prices, the bank sees more room to pay front-end rates in Hungary's forint (HUF) and Czech Republic's koruna (CZK) despite the current high levels.

For foreign exchange, this implies an attractive risk-reward, added ING. Although further escalation may initially lead to a risk-off mood and weakening of emerging market currencies, including the Central and Eastern European (CEE) region, higher inflation and hawkish central banks could eventually drive foreign exchange to stronger levels.

On the other hand, Poland's zloty (PLN) seems more isolated due to the strong local story, according to the bank. In addition, PLN has underperformed CEE peers in recent weeks and should be more resistant. At the same time, higher rates due to a hawkish central bank point to below 4.240.

price action is so far endorsing ING's call that markets aren't ready to take the pair much above 1.160 just yet, said the bank.

The upside risks aren't small, though, for instance, if markets are disappointed with the trade headlines from Canada and oil prices correct lower due to perceived abatement in the Middle East turmoil, noted ING.

On Monday, European Central Bank Governing Council member Joachim Nagel briefly mentioned the oil rally as a potential risk to price stability, and otherwise reiterated President Christine Lagarde's narrative that the ECB is in a good position with rates. But it is indeed oil prices that are likely to have the biggest impact on rate expectations at the moment, wrote the bank in a note to clients.

Unless Brent oil corrects further, markets may not really consider bringing the next cut forward to October.

The euro's contribution to moves remains minimal, but Tuesday's release of the ZEW survey in Germany can have some market impact, stated ING. The "expectations" gauge is seen rebounding further to 35.0, but concerns about the European Union-United States trade standoff could cap the upside.

The bank favors 1.15 rather than 1.16 as a near-term target and has a bearish bias on on Tuesday. But the quite evident market preference to buy the dips in the pair means risks are still generally skewed to the upside.

In Central and Eastern European (CEE) markets, ING sees improving conditions for another foreign exchange rally. Some spike in market rates due to the threat of higher energy prices from developments in the Middle East, in ING's view, correctly reflects expectations of more hawkish central banks in the region.

At the same time, the bank doesn't see a significant flight to quality globally and emerging market currencies strengthening generally. In addition, higher favors CEE currencies and ING expects more gains here across the board in the days ahead.

The Czech Republic's koruna (CZK) in particular should get attention on Tuesday, supported by hawkish central bnak (CNB) views, which should push below 24.750, pointed out ING.

While Hungary's forint (HUF) and CZK currencies are near their local strongest levels and have maintained some gains this year, Poland's zloty (PLN) has underperformed its peers and is essentially the only currency unchanged against the EUR compared with the start of the year.

Given the hawkish bias of Poland's central bank (NBP) in recent weeks, ING believes the problem is a persistent premium in coming from political uncertainty post-election. The interest rate differential itself suggests levels roughly around 4.230-240, indicating a 1% PLN rally if the market unwinds this political factor.

ING doesn't expect any immediate impact on fiscal or general government policy, and after last week's successful confidence vote, the bank doesn't see much reason for PLN to remain at weaker levels. In addition, the NBP is suggesting that another rate cut is more likely in September, while the market still prices in decent odds for July.

As a consequence, ING sees good reason to think PLN will catch up with CEE peers.