“In the coming days, the market will focus mainly on the Federal Reserve meeting. The US monetary authority’s decisions could have a significant impact on the dollar's valuation. Since the perspective of the USA’s interest rates are also important for investors outside the United States, the clear impact of events in Washington, D.C. will also be visible on the zloty,” says Marcin Lipka, senior analyst at Conotoxia.
During June's meeting of the Federal Reserve, when quarterly macroeconomic forecasts were last released, the US Central Bank outlined a path for future interest rates. It indicated that this year, the cost of loans will increase by 0.25 percent and by 0.75 percentage points over the next two years. Since then, however, we have had many important events that could have changed the views of the monetary authorities.
Above all, against the Fed expectations, inflation fell. The PCE's price index fell to 1.40% and was the lowest it’s been since the end of 2015. At this point in the economic cycle, this was a surprising piece of information, as the pace of price growth should accelerate rather than slow down at the time of the record low unemployment rate. The second problem that representatives of the Federal Open Market Committee will have to deal with will be the hurricanes that hit the southern US in August and September.
Forecasts and natural disasters
The dollar's reaction at the Federal Reserve meeting will mainly depend on how the Fed members' decision will be taken in relation to investors' expectations. Bloomberg, between the 12th-14th of September, conducted a survey of leading economists in the world regarding Wednesday's statement of the monetary authorities.
The median market expectations show that the Federal Reserve will continue to suggest a single rate hike this year (by 0.25 percentage points) in macroeconomic projections and three in the future (by 0.75 percentage points in total). This scenario can, therefore, be considered as the core possibility. Any deviation will likely have a noticeable impact on the dollar, especially, in addition to surprisingly low inflation, as the Fed will have to assess the impact of the recent natural disasters have had on the US economy.
Among other things, because of the hurricanes, the number of initial jobless claims over the last two weeks has been close to almost one and a half year highs. Retail sales figures published last Friday were very weak. These fell by 0.2% M/M, but the Census Office was not able to determine whether or not this is the result of extreme weather in the south of the US.
August's readings of industrial production from the United States were also surprisingly weak. It fell by 0.9% M/M. In this case, the institution was preparing the report (Federal Reserve) that estimated that Hurricane Harvey's influence is responsible for 0.75 percent of the decline. However, even if a natural disaster has indeed caused such a significant fluctuation in production, the figures are still not great.
The Fed's influence on the zloty
If members of the Fed consider that the recent weaker macroeconomic readings are primarily due to one-off factors (hurricane) and the economy will likely accelerate when this impact expires in future months, then the projections of future interest rates will probably remain unchanged.
This could have a positive impact on the dollar, despite the fact that it is a core scenario suggested by, for example, Bloomberg. This could push the dollar to the range of 3.60-3.65 PLN in the second part of the current week.
On the other hand, if the Federal Open Market Committee's statement contains concerns about the US economic condition and its much lower than expected inflation, then the dollar could depreciate. If these concerns were combined with the suggestion of no rate hikes this year or a monetary tightening of only 0.50 percentage points in the next year, a more significant depreciation of the dollar could be expected. In such a case, the US currency could even go in the direction of 3.50 PLN. This would also help in regards to the zloty's valuation in relation to the euro, which would most probably tend towards the level of 4.25 PLN.