Yesterday’s Federal Open Market Committee (FOMC) decision came as no surprise: interest rates remained unchanged. Despite this predictable outcome, strong U.S. economic data triggered a sharp dollar rally, which – unexpectedly – did not weaken the Polish zloty. Meanwhile, inflation in Poland has returned to the National Bank’s target range.
Another Strong Day for the U.S. Dollar
Wednesday was a day of anticipation, with markets awaiting economic updates from the United States. It started with labor market data – the ADP employment report exceeded expectations, and GDP figures also came in stronger than forecast. As is customary in the U.S., GDP is reported on an annualized basis, which can obscure the real quarterly picture. If the last quarter’s growth persisted for the full year, the U.S. economy would grow at 3%, rather than the previously estimated 2.4%.
These results show strength in both key economic fronts – employment and growth – despite high interest rates. In such an environment, there is little pressure to cut rates. The FOMC’s decision to keep rates steady was therefore expected.
Fed Chair Jerome Powell’s remarks, however, received mixed interpretations. Some commentators believed he leaned hawkish to appeal to the current administration. But judging by market reactions, the dominant view is that the likelihood of a rate cut has decreased. Most now expect rates to remain unchanged in September and likely in December, pushing potential cuts further down the calendar.
Currency Market Reactions
The dollar opened the day at around 1.1550 on the EUR/USD pair, closing after bouncing off 1.1400 – a significant move. Surprisingly, this did not weaken the Polish zloty, as is typically the case when capital flows into the U.S.
Instead, the zloty gained against the euro, defying analyst expectations. Many forecasted that a EUR/USD move to 1.14 would push the EUR/PLN exchange rate above 4.30 PLN – but it remains 3 groszy below that level. Against the dollar, the zloty did weaken as expected: for the first time since early June, we saw exchange rates approaching 3.75 PLN/USD.
Inflation: Back Within Target, but Not as Low as Expected
Analysts broadly agreed that Polish inflation would fall in July, but the scale of the decline was uncertain. Most forecasts hovered around 3%, slightly below. The actual result came in at 3.1% – not as low as expected, but a significant drop from 4.1% a month earlier.
This is the first time in over a year that Polish inflation has fallen within the central bank’s target range. Over the past year, inflation remained elevated, partially due to energy cost liberalization.
The new reading weakens the Monetary Policy Council’s (RPP) argument against further interest rate cuts. Compared to neighboring countries, Poland still has relatively high interest rates in relation to its inflation rate.
If the RPP accelerates rate cuts, it could trigger zloty depreciation. However, such market movements were not observed yesterday, suggesting that investors do not expect the inflation data to prompt immediate policy changes, especially since it exceeded expectations.
Author: Maciej Przygórzewski – Chief Analyst at InternetowyKantor.pl
Source: CEO.com.pl – Dollar Gains, Zloty Surprises, Inflation in Poland Hits Target
