Military escalation in the Middle East prompted oil prices to surge and government bond yields to rise on Tuesday, threatening currency stability across emerging markets. The United States launched strikes on Larak Island, targets in Khuzestan and Sirik port; Iran responded with missile and drone attacks on American bases in Jordan, Bahrain, Iraq and Kuwait. The exchange marked the first direct military contact between the two powers after a month-long pause and reduced chances for durable peace and restoration of free navigation through the Strait of Hormuz.
Oil and inflation pressures
Brent crude oil rose to around 95 US dollars per barrel, the most expensive since the end of July. The spike raised concerns about further inflation growth and higher interest rates among central banks, triggering a mass sell-off and depreciation of government bonds. The euro zone’s HICP inflation data published on Tuesday showed inflation at its highest level in three years, cementing expectations of a September rate hike at the European Central Bank, which markets priced at 99 percent probability.
Currency moves and risks ahead
The zloty weakened noticeably at the end of August when the EUR/PLN rate rose from just under 4.30 Polish zloty to 4.3445 Polish zloty. For several days it stabilized at levels several groszy higher than those prevailing through most of August. PKO BP analysts warned that with an unfavourable global environment, EUR/PLN should stabilize at elevated levels in the zone 4.33–4.34 Polish zloty, and for USD/PLN they see risk of the rate shifting closer to 3.76–3.77 Polish zloty. Analysts also flagged that the prospect of higher rates weakened appetite for risky assets, causing main stock indices to decline, while the zloty underwent slight depreciation after initial strengthening during the second part of the day.
Source: euro zone's HICP inflation data
