Worse data from the US did not weaken the dollar

The American dollar is one of the strongest currencies today and, interestingly, this is despite yesterday's weaker consumer sentiment readings. Conference Board and durable goods procurement. The yield on 10-year US treasury bonds fell only slightly below 4,3% yesterday and did not have a positive impact on the eurodollar. Instead, since yesterday morning we have been observing strong downward pressure on EUR/USD pair, which retreated from levels close to 1,087 to around 1,082 currently.

The pressure on the euro also affects the Polish zloty, which has also been performing poorly in relation to the dollar since yesterday, creating space for rebound above PLN 4. It seems that the background to the increases in the American currency is primarily a week full of much more important publications than those we saw yesterday.

The direction is clear

Today we will learn the US GDP readings, where expectations suggest a very strong reading above 3%. This pace of economic expansion, despite high and positive real rates in the United States economy, signals that the costs of maintaining the 'higher for longer' stance are in fact lower than the risk of a return of price pressure, and the neutral rate itself may be higher than assumed by the Federal Reserve. However, attention will focus on Thursday's reading PCE inflation, the main measure of price pressure monitored by the Fed, and Friday's industrial data from the largest economies. Since the strength of currencies is always valued in relation to other currencies, Friday's data may be a signal more room for the eurodollar to fall, if the industrial indices from the Old Continent perform poorly compared to the American ones.

Since the beginning of the year, investors have faced declining expectations about how much the Federal Reserve will cut interest rates. Wall Street currently assumes that the Fed will not cut rates by more than 2024 basis points in 75, although in December 2024 expectations indicated more than 150 basis points of cuts. Fed members will also speak today, likely shedding more light on how policy will be shaped this year. However, the direction seems clear. We cannot count on cuts before June, and even a reduction in summer is questionable. Some opinions of US economists indicate that strong economic data may encourage the Fed to maintain rates until late autumn, waiting for the results of the US presidential elections.

The MPC has strong arguments

Such a scenario would probably put a lot of pressure on the euro, where there is much less 'room' to wait, and, therefore, probably also on the zloty, which has been very strong for months. Yesterday, the Federal Reserve's Michelle Bowman reiterated that while inflation will decline at current rates, it is too early to loosen monetary policy. The data on Americans' private consumption published this week, as well as the consumer spending price index, will probably support this position. It is possible that they will even lead to even lower expectations regarding the scale of policy easing in 2024, and let us remember that 2025 will not be so favorable for inflation due to a much lower base.

Regarding the reaction of the zloty to such an eventuality, although USD/PLN would probably rebound significantly above PLN 4, it seems that the downward reaction in the zloty may not be comparable to the euro, because macro data from Poland are still much more solidthan those flowing from Western economies, and the Monetary Policy Council has strong arguments not to cut rates at least until mid-year, while the pressure to cut the ECB is growing. Today we pay just over 4,31 for the euro, the US dollar is approaching PLN 4 again, the pound sterling is quoted at 5,038, and the Swiss franc costs 4,527.

Source: Eryk Szmyd, XTB