The Federal Reserve caught consensus off guard last week by deciding to cut interest rates by 50 basis points (b.p.). Despite the magnitude of this move, the Fed decided to communicate less doveish messages and presented a hawkish dot plot, suggesting a gradual cycle of cuts. As a result, the dollar only weakened slightly, which benefited risky assets including the Polish złoty.
Key points:
- The złoty remains strong despite poor domestic data.
- The USD experienced a minor sell-off following the Fed’s major cut.
- The FOMC surprised with a 50 b.p. cut, but the dot plot is hawkish.
- PMI indicators for the eurozone fell, indicating weak growth in Q3.
- The BoE maintained interest rates and suggests gradual cuts.
Risky assets worldwide – including the złoty – were gaining, and the dollar took the cut quite calmly. This was aided by the Fed’s communication being much less doveish than the move alone would suggest, indicating that the bank is not particularly concerned about the state of the US economy for now. Safe haven currencies fared worst last week, particularly the Japanese yen, which lost ground after another doveish Bank of Japan meeting. The British pound stood out positively – it benefited again from the relative hawkishness of the central bank, which left interest rates unchanged, one of the highest among G10 economies.
Last week was good for the złoty – like many similar currencies, it strengthened against the weaker dollar. However, it only recorded minimal gains against the euro, its reference currency. The złoty’s situation has not changed significantly for about half a year – the currency remains strong and is moving sideways. Recent economic readings from Poland were not good. The production index disappointed last week, and construction and retail sales at the beginning of this week. The latter strengthens the belief that the recovery in consumer demand does not yet have a solid foundation. Employment data is mixed: a significant drop in employment is accompanied by higher wage dynamics.
The question of whether the European Central Bank will decide on another interest rate cut in October following the cut in September is not any easier than it was a week ago. Chances seem low – persistent inflation suggests that cuts will likely continue at a quarterly pace. As suggested by Draghi’s report on Europe’s competitiveness, the eurozone’s stagnation does not seem to be linked to the level of interest rates.
The impact of the Federal Reserve’s 50 b.p. interest rate cut on the dollar was limited. We primarily attribute this to less doveish communication, in particular to the projection of the level of interest rates – the Fed is planning a rather gradual pace of rate cuts.
The Bank of England kept interest rates unchanged last week, almost the highest among G10 economies (the exception being New Zealand). The voting result was almost unanimous – only Swati Dhingra argued for a cut. As we expected, the bank’s rhetoric was quite hawkish. Again, it highlighted the risk associated with cutting interest rates too quickly and too heavily.
Author: Enrique Díaz-Alvarez, Matthew Ryan, Roman Ziruk, Eduardo Moutinho, Itsaso Apezteguia, Michał Jóźwiak – Ebury Analysts
Source: https://ceo.com.pl/zloty-stabilny-mimo-slabych-danych-98289
