The last few days have brought one of the strongest rallies in the dollar’s strength. The U.S. currency experienced its biggest weekly appreciation since October 2022, followed by a very dynamic sell-off after the release of Friday’s Non-Farm Payrolls (NFP) report. The dollar also significantly strengthened against the Polish zloty, with the USD/PLN exchange rate returning to levels last seen in early June.
Key points:
- USD posts strongest rise since October 2022
- NFP report triggers USD sell-off
- Fed remains hawkish but rate cut expected in September
- New Trump tariffs come into effect
- EUR declines as investors digest US–EU trade deal
- Bank of England expected to cut rates, with possible split votes
During the first four days of last week, the dollar strengthened vigorously. The EUR/USD pair—a key global trade benchmark—fell from about 1.18 to 1.14 in just a few days, marking its sharpest drop since 2022. The U.S. dollar was supported by the highly asymmetric U.S.–EU trade agreement, solid GDP report, and a rather hawkish Fed pause. However, Jerome Powell briefly discouraged investors from pricing in a September rate cut. Friday’s NFP report completely changed the market’s view on the U.S. labor market’s condition and, consequently, on Fed rates, causing an immediate sell-off of the dollar.
The deadline for trade negotiations with the United States passed, triggering significantly higher tariffs for many countries. Yet volatility on Thursday night into Friday remained fairly limited, largely because most key agreements had already been reached and the higher tariffs on Switzerland (39%) and Canada (35%) will apply only temporarily. Next week marks the end of the truce in the U.S.–China trade war, though its extension seems nearly certain.
Of major importance to markets will be Thursday’s (August 7) Bank of England meeting. Another 25 basis point rate cut seems very likely, though voting may split into three groups (cut by 25 or 50 basis points, or pause), with commentary suggesting future cuts might occur at most once a quarter.
PLN
The last days of July saw the strongest USD/PLN increase since April 2024, mainly due to the highly asymmetric U.S.–EU trade deal, decent U.S. GDP growth in Q2, and fairly hawkish Fed communications. Dollar gains were, however, limited by poor U.S. labor market data.
Against the benchmark euro, the zloty remains in a very tight range. Since the April “Liberation Day,” EUR/PLN volatility has stayed within 6 groszy (4.23–4.29). While global uncertainty has decreased significantly, external factors—including ongoing assessments of the economic impact of the transatlantic trade deal and further news from the White House—will remain key for the Polish currency in August.
Domestic data last week had little impact on the zloty. July inflation slightly exceeded expectations but fell below the upper limit of the NBP’s target range (2.5% ± 1 pp). This confirmed expectations that the Monetary Policy Council (RPP) will continue rate cuts this year, although the scale and timing remain uncertain. Another cut is expected at the September meeting. Beyond external factors, the further path of rates will depend on energy price regulations and, especially, the autumn budget.
The parliamentary vote on extending the electricity price freeze will take place Tuesday (August 5). The bill also includes provisions unlocking investments in onshore wind farms and will likely be vetoed by Karol Nawrocki, who will be sworn in as President of Poland on Wednesday (August 6). Although the decision probably won’t be made this week, prices are expected to remain frozen at least until year-end. Somewhat greater uncertainty surrounds budget matters. In light of looser fiscal policy, the RPP might opt for more conservative monetary actions, reducing space for further rate cuts. More clarity is expected in September.
EUR
Markets continue to view the details of the U.S.–EU trade agreement critically, which last week caused the euro to briefly fall below 1.14 against the dollar before rebounding on Friday. The 15% tariffs are much lower than the 30–50% threatened by Trump in recent months. Still, markets and European countries had clearly hoped for better terms, including greater concessions and baseline tariffs closer to 10%, which officials sought during negotiations.
Market participants will now monitor the tariffs’ impact on the Eurozone economy. The August PMI indicators, the first real readings in this context, will not be available until August 23. So far, the economy is coping reasonably well—the recent Q2 GDP release (1.4%) and July inflation data (2%) surprised to the upside. This should reduce pressure on the European Central Bank to cut rates again. Markets currently price in about a 50% chance of another cut before year-end.
USD
The past few days have been tumultuous for the dollar. The U.S. currency experienced strong appreciation for most of the week until Friday’s NFP report shook the markets. Fed communications after Wednesday’s meeting were hawkish. Chairman Jerome Powell spoke positively about labor market strength and suggested no rush to ease monetary policy further. Unusually, two FOMC members (Michelle Bowman and Christopher Waller) voted for a rate cut—the first time in over 30 years that two regional Fed presidents dissented during the same meeting, not just voting members.
This dovish dissent proved well-founded. Although the July NFP reading—despite a downward surprise—does not present serious cause for concern, an unusually large downward revision of May and June data totaling 258,000 jobs is definitely worrying. This strongly changed our perception of the U.S. labor market and should completely shift the Fed’s narrative, which will likely have no choice but to decide on a rate cut in September.
GBP
Last week in the UK was extremely quiet, almost entirely lacking significant data or fiscal and monetary policy news. The pound’s trading largely depended on dollar movements, causing GBP/USD to fall to its lowest level since mid-May before rising to about 1.33 after Friday’s weak NFP report. Concerns about the UK’s fragile fiscal outlook remain, but given July’s pound sell-off, some room for a modest appreciation likely exists.
Attention will focus this week on the Bank of England’s statement on Thursday (August 7). Rising inflation and a highly concerning labor market situation put the Committee in a difficult position. Although most policymakers are expected to vote for a 25 basis point cut, we would not be surprised if votes split into three groups: most supporting a 25 bp cut, some favoring a larger 50 bp cut, and one or two preferring no change. Beyond the vote split, it will be interesting to see whether the BoE maintains rhetoric about “gradual and cautious” future cuts. We suspect it will—but if this stance changes, the pound will almost certainly face selling pressure.
Authors: Matthew Ryan and Michał Jóźwiak — Analysts at Ebury
Source: https://ceo.com.pl/fatalne-dane-z-rynku-pracy-koncza-spektakularny-rajd-dolara-21039
