The EUR/USD dropped before the Fed’s meeting. Solid reports from the eurozone. The zloty declined after weak data on the current account.
The eurozone production rose more than economists anticipated. Production increased 0.6 percent on a monthly basis after plus 0.3 percent in the prior month. It was the strongest gain since February. Production rose 1.9 percent against the previous year.
Today's reports showed some improvement in the economic landscape. However, it was quite surprising. Recently, the European Central Bank revealed weaker forecasts. The forecast for the GDP growth and the inflation rate has been lowered. The monetary authorities cited the Chinese crisis as the threat for the emerging market economies. As the export in this direction weakens, the monetary union expansion will slow down due to lack of strong internal demand.
Given the situation, there were mounting speculations that the ECB will expand its quantitative easing. More than two-thirds of the economists claimed that the Frankfurt-based institution will decide on making similar actions, according to Bloomberg monthly survey. In the long term, this factor will negatively affect the euro.
The FOMC meeting
The summit of the Federal Open Market Committee will be the major event of the week. The US central bank will reveal its decision on the interest rates. Just a few months ago, the investors believed the September meeting will bring the first interest rate hike in a decade. However, the probability of a similar move is very low.
The major reason for that is the Chinese crisis that may result in global economic slowdown. As a result, the outlook for inflation returning to the Fed's goal has been deteriorated. Nevertheless, some market participants expect hike. The major argument for this solution is the labor market expansion. And the low inflation rate is due to transitory factors (record low oil prices), according to these investors.
A solution that will bring all sides together will be the Fed to postpone hike to the December meeting. There will be enough time to assess the real impact of the Chinese turmoil.
The zloty dropped
Investors are still worried by the Chinese economy. Although the numbers on industrial production and investment were near their prior moth readings, they missed the forecasts. These were additional signals that the economy is slowing down. This factor will negatively affect the emerging market currencies. The likelihood the China's GDP growth will reach 7 percent is very low.
The zloty started the week with decline. The Polish currency dropped against all its major pairs. However, the move was limited. It was rather a correction of the previous week's gains.
Moreover, the zloty was negatively affected by the report on the balance of payment. The current account deficit stood at 1.6 billion euros against the 490 million euros that was forecast. The zloty extended decline after the release.
In the short term the FOMC meeting will determine the zloty developments. No hike will support the Polish currency. However, in the long term the zloty direction will be shaped by the assessment of the Fed's statement. If the hike is postponed more than expected, the zloty may extend gains.