Potential Rate Cuts Might Not Dent Polish Zloty — Market Talk

The Polish zloty stays higher against the euro, showing little reaction after Poland's central bank cut interest rates by a widely expected 25 basis points to 4.25%. Recent data supported the case for rate cuts, with headline inflation easing in September, Capital Economics economist Nicholas Farr says in a note. "That said, we still think that price pressures will build again before long," he says. The central bank is likely to deliver one more 25 basis-point rate cut early next year before an extended pause in policy easing, he says. The euro falls 0.1% to 4.2553 zloty, little changed from levels before the decision. (renae.dyer@wsj.com)

The Polish zloty could weaken over the coming quarters given the prospect for further interest-rate cuts, Commerzbank's Tatha Ghose says in a note. National Bank of Poland member Cezary Kochalski told Bloomberg he sees higher odds of rates staying unchanged in November after last week's unexpected rate cut. However, he said a cut was possible if updated projections show inflation nearing target by the second half of 2026. The minutes of September's meeting, released Friday, appeared to show a focus on inflation having decelerated noticeably, Ghose says. Given the direction of data, the NBP could revise inflation projections lower, he says. The euro rises 0.1% to 4.2613 zloty, having reached a 10-day high of 4.2686 Friday, LSEG data show. (renae.dyer@wsj.com)

The Polish zloty falls after the country's central bank cut its benchmark interest rate by a quarter of a percentage point to 4.5%. Market pricing ahead of the decision implied a close call between a rate cut and unchanged rates. Recent comments from policymakers indicated at least one more rate cut this year, but it was unclear over the timing of the next cut. The euro rises to an intraday high of 4.2590 zloty after the decision from 4.2489 beforehand. (renae.dyer@wsj.com)

Karol Nawrocki's victory in Poland's presidential election earlier this year has weakened the outlook for the Polish zloty, Commerzbank's Tatha Ghose says in a note. Nawrocki, whose candidacy was backed by the right-wing Law and Justice party, took office in early August. This will extend the stranglehold on budget and structural reforms, Ghose says. Nawrocki has already vetoed four bills and injected himself into every major policy debate. The fiscal situation could worsen, Ghose says. "Because of the political situation which will continue this way until the 2027 general election, the broader environment remains zloty-negative." Commerzbank expects the euro to rise to 4.3500 zloty by December 2026 from 4.2475 currently.(renae.dyer@wsj.com)

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.