Zloty caught in a scandal. Forecast as of 13.09.2023

A central bank's policy easing ahead of elections is usually regarded as supporting a party in power. The Bank of Poland went further and dropped rates by 75 basis points. Lets discuss it and make a trading plan for the EURPLN.

Monthly fundamental forecast for zloty

Monetary policies change based on economic cycles. Rate hikes follow rate cuts. The Bank of Poland started monetary expansion one of the first, provoking a scandal. The zloty tumbled against the euro the fastest since the Russian invasion of Ukraine, and the EURPLN bulls want more.

Donald Trump once called Jerome Powell “the main enemy of the USA.” The Polish opposition went further, promising to convene a state tribunal to hold central bank governor Adam Glapinski to account for his failure to fight inflation and undermining the NBP's independence if it won the elections.

True, the 75-bps rate cut to 6% in September has been like a bolt from the blue. The economy didn't look so weak for such a significant cut, and inflation grew faster than in the euro area, being currently at 10.1%.

Most journalist experts predicted a 25-bps decline in borrowing costs, and Credit Agricole said monetary expansion was likely but unjustified. The French bank thinks Adam Glapinski's hints at easing policy meant the NBP had other goals besides handling the CPI. Goldman Sachs notes the core inflation remained sticky, so cutting rates looked untimely.

However, the rate was cut, and what a cut it was! Societe Generale called the Bank of Poland's September rate decision “a bazooka cut,” while Erste Bank said the NBP “outran the market expectations by six months” and can rest for a long time now.

However, the accompanying statement mentioned that the current policy easing is proactive, while Adam Glapinski said the decision was based on a radically changed outlook for German GDP. He called growing German recession risks an alarm for national exports. The Central Bank governor expects Polish inflation to drop to 8.5% by the end of the year and refuses to give a clue for further rate cuts.

As a result, the EURPLN soared to the highest since early April. At the same time, Societe Generale predicts further easing by 50 basis points in October. The zloty can face a serious headwind as the ECB is ready to raise borrowing costs.

Monthly trading plan for the EURPLN

Even if Adam Glapinski attempted to describe September's rate cut as obligatory for currency wars, politics remains the prevailing explanation. Particularly his connections with the Law and Justice ruling party. The EURPLN risks rising higher before the elections on 15 October, so use pullbacks with subsequent retracements from support at 4.63-4.634 and 4.61-4.618 to go long.