Can minutes help the dollar?

The dollar is currently one of the weakest currencies on the market. This is related to the good market sentiment, which leads to the search for higher rates of return, and additionally the certainty that the Fed will not increase interest rates either this year or in this cycle. On the other hand, the Fed may have a different opinion and we will find out today during the publication of minutes from the previous meeting regarding the level of interest rates.

Rate cuts may come sooner

EUR/USD is approaching 1,10 and is the highest since August this year. Looking at this year's chart and also the longer term, There is still plenty of room for potential steam growth. However, the growth in the pair requires further weakness of the dollar and, preferably, strengthening of the European currency. In the case of the euro zone, the economic situation is not the best, but at the same time it seems that the worst times are behind us. Looking at the dollar, further prospects will depend on the global geopolitical situation and the monetary situation in the United States. Fed it last raised interest rates in July, but is still trying to show a fairly hawkish stance. Perhaps this attitude will be demonstrated again today during the publication of minutes from the November meeting. On the other hand, looking at history, interest rate cuts may come sooner than currently expected.

The market estimates the chances for the first cut approximately in the middle of the year, although after the latest inflation readings it began to estimate approx. 30% chance for the first discount in March. Interestingly, going back to the previous tightening cycle, we see that the first reduction in interest rates took place approximately 6-7 months after the last increase. This would give a chance that the first cut could actually take place in March, but for this we would have to notice a clear change in communication from the Fed. At the moment, the Fed remains neutral, although at the same time it does not want to clearly indicate that it will not increase interest rates.

KPO and promising macro data

A weak dollar and falling yields in the US favor the Polish zloty. Couple USD/PLN fell below PLN 4 and tested the local lows from July this year. In turn, EUR/PLN fell below PLN 4,35 and is the lowest since March 2020. If the rumors regarding KPO turn out to be true, the zloty will still have room to strengthen further. Meanwhile, data from Poland look very encouraging. Wages for October are growing slightly higher at 12,8% y/y, but it must be remembered that, due to the base, the increases will most likely shrink in the following months. In addition, industrial production rebounds to 1,6% y/y, and producer inflation drops more strongly to -4,1% y/y.

After 10:00 we pay PLN 4,3496 for the euro, PLN 3,9741 for the dollar, PLN 4,4959 for the franc and PLN 4,9811 for the pound.

Source: Michał Staniak CFA, XTB