Dollar on the boards ahead of the Federal Reserve decision

Yesterday was not a particularly special day in terms of economic events or publications, and yet it was yesterday that we witnessed a move that led EUR/USD pair quotes to levels not seen in four years. This means the dollar has reached its cheapest level in seven years against the Polish zloty. All this just one day before the Fed's decision.

Yesterday's US data should theoretically even be supportive of the dollar. The strong retail sales report seems to demonstrate consumer resilience despite troubling signals from the labor market.All indications are that the Federal Reserve will opt for a "normal" interest rate cut today (by 25 basis points) and will likely announce two additional such moves at its meetings remaining until the end of the year.

So why is the dollar depreciating?

The current Fed chairman's term ends in May of next year. The entire period of "cooperation" between Jerome Powell and President Trump has been very tumultuous. Although the president has withdrawn any plans to dismiss Powell, pressure on the chairman remains relentless. The market therefore rightly assumes that from the middle of next year we must take into account a much looser monetary policy.

Because the US is operating with a very high deficit and debt seemingly on an unsustainable trajectory, it needs lower financing costs. Lower interest rates would, of course, stimulate the economy. A side risk, of course, is a possible return to inflation – services inflation is already elevated, and the impact of tariff increases is expected (moderate, but still). Politicians are usually willing to take such a risk, but a prudent central banker may not. The markets fear that this balance of risks will change with the new Fed chairman and the dollar will lose.

Does a break above the 3,60 level on the USD/PLN exchange rate matter? In my opinion, it's not crucial. The zloty's performance is primarily measured by the EUR/PLN pair, where prices have stagnated in the 4,23-4,27 zone. There's no sign of any change here. However, the EUR/USD break above the July peak confirms the strong upward trend in this pair and could therefore push the USD/PLN rate even lower.

At 8:00 a.m. the euro costs PLN 4,25, the dollar PLN 3,58, the franc PLN 4,55 and the pound PLN 4,89.

Source: Dr. Przemysław Kwiecień CFA, XTB