The market continues to discount the change in the Federal Reserve's approach to inflation. The EUR/USD exchange rate rises above 1.19, opening the way for the zloty to strengthen on Friday. Although the USD/PLN pair falls below 3.70 and the EUR/PLN rate drops below 4.40, nothing fundamentally changes.
Increased fluctuation on the dollar
Trade on Friday around midday brought another weakening of the US currency. At night, the main currency pair was just above 1.18 (about 1.181-1.182). However, in the morning, the supply pressure on the dollar accelerated and before midday, the EUR/USD exchange rate rose to 1.192, the highest level in nine days.
This is most likely the result of yesterday's statement made by the chair of the Federal Reserve about an average inflation target, which de facto means that interest rates will be close to zero for longer (the Fed will allow inflation to "overshoot" and will not react preventively). Although this was expected, and the dollar fluctuated strongly even yesterday after Powell's speech, the market will most likely need several days to discount this decision.
Most of the positive macroeconomic data coming recently from the US economy (including yesterday) did not help the dollar. This may change, as the market has to prepare itself for next week's publication of the US labour market report for August. If the readings from the labour market exceed expectations and confirm the positive trends in the economy, the demand for the dollar may increase.
Until then, on the one hand, we can observe increased (for the dollar) fluctuations as the market values the change in the approach towards inflation. On the other hand, it will be difficult for the dollar to appreciate more strongly in the coming days, above the levels we have observed recently.
The weakening of the dollar may have been less affected by the resignation of Shinzo Abe, the Prime Minister of Japan, for health reasons. His resignation could potentially be associated with a stronger yen, and its strengthening was also seen today. The USD/JPY fell by 1.25% today to about 105.2, which is also close to the bottom line for the past month.
Weaker dollar combined with a lack of strong negative sentiment on the broader market have a positive effect on the zloty. Today, the zloty is one of the best-performing currencies of emerging countries (EM), although these are not fundamental changes in its case either. The USD/PLN exchange rate dropped again below 3.70, close to 3.68 - and although this is the lowest level in nine days, the USD/PLN pair is still closed in a limited volatility range without a clear path in either direction. The EUR/PLN exchange rate, on the other hand, fell slightly below 4.40 - here, however, the volatility is further limited by the still good condition of the euro globally.