The zloty is the weakest since mid-June. What’s the harm to him?

The last few weeks belong to the dollar and it is interesting because the American currency started to gain almost immediately after the Fed started the cycle of interest rate cuts, immediately with a cut of 50 bp.

Investors do not believe in the Fed cutting financial rates

– We are observing a strengthening of the dollar on the currency markets, which is related to a clear weakening of the prospects for a reduction in interest rates by the Fed – says Michał Stajniak, deputy director of the Analysis Department at XTB, in an interview with MarketNews24.

Looking at this decision from the perspective of a few weeks, one can risk the thesis that the Fed would perhaps have decided on a smaller cut if it had known the data we know today. We are talking about the most important reports – on the labor market, on inflation and retail sales. In September, the Fed may have been concerned that the American economy was sliding into a deeper slowdown, but the latest data did not confirm this. Paradoxically, since the Fed’s decision, the yields of American bonds have increased.

However, this is not the only reason for the relatively strong dollar recently. Fuels also provided worse data from Europe, suggesting a deepening slowdown and de facto forcing the ECB to cut interest rates “off schedule.” The ECB began the cycle of cuts in June, but planned to cut rates only once a quarter. Meanwhile, weaker data forced the Bank to make another cut in October (the third in the cycle) and lowered expectations for the target rate in the euro zone to 1.75%.

Inflation in the euro zone is on a downward trajectory

The ECB’s decision remained in line with previous expectations. The market predicted interest rate cuts by 25 basis points, and this scenario was reinforced by data coming from European economies. However, at the conference, ECB President Christine Lagarde very clearly emphasized the lack of attachment to a predetermined path of interest rate cuts, and thus emphasized even more the dependence of decisions on incoming data from economies.

– If we look at the EUR/PLN pair, we no longer see such a weakening of the Polish currency as in the case of the USD/PLN pair – comments the XTB expert. – And it is related to the weakness of the euro.

For now, inflation in the euro area remains on a downward trajectory, which has further accelerated over the last two months, falling below the inflation target. Price formation in Europe remains strongly dependent on geopolitical tensions, the war in Ukraine, conflicts in the Middle East, and recently increasingly tense trade relations with China.

In such an environment, the specter of finally defeating inflation and embarking on a rapid reduction in interest rates in order to stimulate the economy may be a premature vision. Especially since forecasts indicate a possible rebound in price dynamics in Europe at the end of this year. Therefore, it should be expected that the ECB’s next decisions will be made carefully, and the central bank will want to avoid sudden fluctuations in interest rates, such as a 50 bp cut, unless the economic situation requires it.