Dollar's weakening continues (Daily analysis 30.12.2019)

The euro appreciates against the dollar, and the EUR/USD exchange rate reaches its highest level since August. The weakness of the US currency is, among other things, a result of expectations regarding progress in trade negotiations between China and the USA. The weakening dollar is good news for the zloty.

The EUR/USD exchange rate the highest in four months

On the second to last trading day this year, we observed a further weakening of the dollar. In the morning, the euro/dollar exchange rate (EUR/USD) reached about 1.1211, the highest level since August. There is no specific trigger for this dollar's depreciation in recent days. Still, it has been happening since the beginning of the holiday period, which is characterized by a lower trading volume. Some market participants may already prepare themselves for next year when interest rates in the US are not expected to rise.

The curve of the implied interest rate (based on Fed fund rate) for 2020 indicates a decrease in the rate from 1.55% to 1.38% at the last meeting of the Federal Reserve Monetary Committee (FOMC) next December. This suggests that the market is even expecting interest rate cuts. The Federal Reserve indicated a pause in further rate changes (after three consecutive cuts of 25 basis points), which were a reaction to external factors. Jerome Powell, Chairman of the Fed, stressed at the last press conference after the committee meeting what must happen for interest rates to rise. The core inflation (PCE) would have to increase significantly, but this is currently not expected by the Fed or the market. Therefore, the baseline scenario seems to be that there will be no changes in interest rates in the US next year.

The continual weakening of the dollar, especially against the euro, is also the result of expectations that the first phase of the agreement with China and the suspension of further duties will raise the eurozone economy, which is significantly dependent on exports, out of stagnation. This may lead to a relatively strong euro against the dollar in the first months of 2020. International trade will continue to be the most significant risk factor next year. However, the final result does not seem to be negative, due to the US presidential elections or the economic slowdown in China, among others. Nevertheless, President Donald Trump's actions so far may suggest the occurrence of the risk that he may again use more confrontational negotiation techniques.

Sentiment supports the zloty

Worse dollar condition at the end of the year is good news for the Polish currency. The zloty basket remained stable around midday. The EUR/PLN exchange rate was in the range of approx. 4.255-4.27, which was within the fluctuation boundaries of the last two weeks. Looking at the larger picture, the exchange rate also remained close to the bottom level (ca. 4.23) since May 2018. If we continue to observe the euro's appreciation against the dollar and the EUR/USD price increase clearly above 1.12, the zloty may further strengthen.