The Polish Złoty is at its weakest since mid-June. The Polish currency has weakened due to the strong performance of the Dollar. Theoretically, the reverse should be true due to interest rate cuts in the U.S. However, the strengthening of the Złoty is not the baseline scenario.
These past weeks have favored the Dollar. Interestingly, the U.S. currency began gaining nearly as soon as the Federal Reserve started a cycle of interest rate cuts starting with a 50 basis point reduction.
“We are observing a strengthening of the Dollar in currency markets, which is related to a rather distinct weakening of the perspectives for interest rate cuts by the Fed,” Michał Stajniak, vice director of the Analysis Department at XTB, told MarketNews24.
Looking at this decision from a few weeks’ perspective, one could risk the thesis that the Fed may have decided on a smaller cut, had they known the data we know today. The most important reports concern job market, inflation, and retail sales. In September, the Fed might have been afraid that the U.S. economy was heading for a deeper slowdown, but the latest data have not confirmed this. Paradoxically, since the Fed’s decision, U.S. bond yields have increased.
However, this is not the only reason for the relatively strong Dollar lately. Poor data from Europe, suggesting a deepening slowdown and effectively forcing the European Central Bank (ECB) to cut interest rates “out of schedule” fueled it. The ECB began a cycle of rate cuts in June, but planned to cut rates only once per quarter. Meanwhile, weaker data forced the bank to cut rates again in October (the third cut in the cycle) and lowered expectations for the target rate in the Eurozone to 1.75%.
The ECB’s decision stayed in line with previous expectations. The market predicted interest rate cuts by 25bp, a scenario strengthened by data coming from European economies. However, ECB President Christine Lagarde emphasized the lack of commitment to a preset interest rate cut path, highlighting the dependency of decisions on incoming data from economies.
“If we look at the EUR/PLN pair, we don’t see such a weakening of the Polish currency as in the case of the USD/PLN pair,” comments the XTB expert. “And it is associated with the weakness of the euro.”
At the moment, inflation in the Eurozone remains on a declining trajectory, which has accelerated over the last two months, falling into the area of inflation targets. Pricing in Europe is heavily dependent on geopolitical tensions, war in Ukraine, conflicts in the Middle East, and increasingly tense trade relations with China.
Given such an environment, the specter of final inflation defeat and a path to rapid interest rate cuts to stimulate the economy may be a premature vision. Especially since forecasts indicate a possible rebound in the price dynamics in Europe by the end of this year. Therefore, it is expected that future ECB decisions will be taken cautiously, and the central bank will want to avoid sudden fluctuations in interest rates like a 50 bp cut, unless the economic situation requires it.
The Dollar can also be helped by Donald Trump’s increasing chances of presidency. As president, he can raise tariffs, maintaining inflation, which would translate into a relatively more restrictive Fed policy.
Therefore, Fed interest rate cuts have not weakened the Dollar, even though theoretically, a central bank’s lowering of interest rates should weaken a given currency.
“There is a potential that the Dollar will be even stronger over the next few months,” added. Stajniak. “Much will depend on the state of European – especially German – economy.”
The ECB is no longer hawkish, but neither is the National Bank of Poland (NBP). Interest rate cuts by the Monetary Policy Council may start as early as March next year. And these can be successive cuts down to 3.00-3.50%.
What may be the Dollar exchange rate against the Złoty by the end of this year?
“Looking at the trend in the USD/PLN pair, it is clearly upward, so I do not rule out the weakening of the Złoty to 4.00-4.05 PLN,” answered the XTB expert. “However, if it turns out that inflation in Poland becomes a growing problem and gets out of control, rises to 5-6% with a prospect of rebounding up by another percentage point, then for the Dollar we will pay 4.20-4.30 next year, but at the moment this is not a baseline scenario.”
Source: https://managerplus.pl/polska-waluta-pod-presja-zloty-oslabia-sie-wobec-silnego-dolara-25402
