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  • Writer's pictureBocconi Students Financial Markets
    • Nov 17, 2023
    • 5 min read

Report on EUR/PLN



Introduction and a bit of history


EURPLN is one of the most popular currency pairs among Polish retail investors. On the international markets, the euro to złoty exchange rate doesn't hold much significance, and it is classified as one of the exotic currency pairs. Since 1990, Poland has adopted nearly all possible exchange rate regimes, transitioning from a fixed exchange rate to a fully flexible one. The history of the Polish currency (złoty- PLN) that we know today started on the 1st of January 1995 with redenomination, where 10,000 old złoty became 1 new złoty. In 2004 Poland's accession to the European Union brought significant strengthening of the Polish currency. Additionally, as a member of the EU, Poland is obligated to adopt the euro when all specific conditions are met. However, there is no time limit for fulfilling such requirements.


One of two major historical peaks in the pair was reached in early 2009 and March of 2022, price pushed the previous all-time high by a marginal value of 0.08 PLN (0.018 EUR) to a new peak of 5 PLN for 1 EUR. Historically, the lowest rates were observed in the years 2001 and 2008. While the former was the cause of restrictive monetary policy leading to a slowdown in GDP growth, which, in turn, increased the budget deficit, the latter was a direct aftermath of the worldwide financial crisis.



A fundamental analysis of EURPLN certainly needs to take into account macroeconomic data from the individual countries in the eurozone and Poland, as well as communications from the ECB and the Polish Monetary Policy Council (Rada Polityki Pieniężnej- RPP). Fluctuations in the value of the Polish złoty can also be influenced by significant political events, both domestically and on a global scale. It's important to remember that signals coming from the world's largest economies, such as the USA, can lead to either an inflow or outflow of capital from emerging markets, and thus impact interest in the Polish złoty. Recently, the exchange rate has been mostly prone to political changes that took Poland and the whole of Europe by storm as the government shift is expected following October’s elections.


2023: Analysis


In the first quarter of 2023, the markets in the Central and Eastern European (CEE) region were not only influenced by the conflict in Ukraine but also by persistently high and unabated inflation. Throughout the region, core inflation was high and showed a slight tendency to slow down. Despite NBP’s (Polish National Bank) promise to make stable adjustments to interest rates, the price of EUR/PLN began its 6-month-long aggressive plummet. Additionally, decreasing prices of natural gas, which is correlated with the strength of PLN, and decreasing PMI even further deepened this state.



At the beginning of the second quarter, Polish złoty benefited from a sharp improvement in market sentiment following CPI reading from the USA. It turned out to be lower than already modest expectations, causing a drastic drop in the value of the US dollar. Meanwhile, the quotes of the Polish złoty, Czech koruna, and Hungarian forint soared.


Despite signals of an increasingly milder stance by the RPP towards tightening monetary policy, the Polish złoty continued to strengthen noticeably, which was a consequence of greater optimism in the broader market, including improved sentiments surrounding emerging market countries and positive readings of first quarter's GDP, and signals of foreign capital returning to the Polish stock exchange.


At that time Ukraine confirmed that the long-awaited counteroffensive operation had been underway, which was the stimulus that many investors had been waiting for. Events in Ukraine were a key factor that weighed on the Polish market in 2022 both directly and through the spectre of an energy crisis that ultimately did not materialise.


For the next few months, the CEE region lived on solid data from the USA and the fact of the weakening dollar. However, the first indications of troubles for złoty were on the horizon. While the National Bank of Poland (NBP) increasingly stated that it was only waiting for inflation to drop below 10%, which could have happened in the near future, to consider a reduction in interest rates, the European Central Bank (ECB) continued to maintain announcements of further rate hikes.


Euro Area Interest Rate


Poland Interest Rates


The European Central Bank (ECB) did not surprise the markets or investors, and in line with widespread expectations, raised interest rates by another 25 basis points in July. Contrary to prevailing sentiments, the President of RPP decided to lower them by 75 basis points, which resulted in a massive spike in exchange of EUR/PLN. In addition to the surprising decision of RPP, the global strengthening of the U.S. dollar did not support the Polish złoty.


Future of EUR/PLN


The results of the first exit polls on October 15th gave Poland hope for a significant change in the political landscape, which could have influenced the financial markets and the strength of the złoty. In the upcoming days, it was confirmed that Poland's ruling party lost their parliamentary majority in the nation's most pivotal election in decades, raising the possibility of a huge political shift that cheered Polish financial markets. As confirmed by the vote count, the result might be an end of eight years of government by the Law and Justice (PiS) party, and allow Donald Tusk (former President of the European Council and former PM of Poland) to put Warsaw on a pro-European path, restore the independence of judges and unlock billions of euros of EU funding that was withheld by the European Commission in a quarrel with the PiS over judicial reforms. Following those results, the exchange of EUR/PLN aggressively plummeted, showing the growing strength of the PLN. The outcome is the best-case scenario for the złoty, yet medium-term challenges remain. Deeply negative interest rates will not disappear overnight, and inflation could be sticky next year. Although a gradual drift towards a slightly more restrictive fiscal policy can be expected, high borrowing needs will also stay in place.


However, the initial positive market reaction could fade if the political uncertainty persists. The handover of power could take up to two months, as PiS, despite a parliamentary minority, is trying to form a government, although these efforts appear to be pointless.


While the government could soon change hands in Warsaw, NBP is set to remain under the helm of pro-PiS central bankers, led by its president Adam Glapiński, who was reappointed for his second six-year lasting term in 2022. But is there hope for his dismissal? Technically, yes, as his second term is against the law. But as experts underline, this would be a really complicated procedure to achieve.


With great hopes for a better future, the exchange of EUR/PLN for now consolidates at levels of 4.4 and steadily waits for further decisions.


References:


Overall view on history of EUR/PLN


Redenomination of EUR/PLN


Historical chart of EUR/PLN, USD/PLN


Analysis of EUR/PLN


Future of Polish złoty


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