Dollar still depreciates (Daily analysis 31.08.2020)

The euro valuation against the dollar is again approaching 1.20 USD. The zloty remains stable, with the EUR/PLN pair just under 4.40. However, this week we can also observe significant fluctuations on the dollar, with the biggest one around Friday.

Data that come this week will have a great impact on the US currency

Monday began again with a continuation of the sentiment observed at the end of last week. After a speech by Jerome Powell (Chair of the Federal Reserve), who announced a departure from the inflation target in order to achieve average inflation over time, the dollar is currently in a weaker condition.

This is the result of market expectations that interest rates will remain low in the US for longer (the Fed will allow inflation to "overshoot" to compensate for the periods when it was low). The dollar's valuation on the global market is also not improved by positive macroeconomic data that came from the US last week.

Today, the dollar changes were not significant, but the EUR/USD exchange rate rose by about 0.25% above Friday's closing level, to 1.1930, practically to the upper limit from May 2018. This is still close to the 1.20 boundary, above which the euro/dollar quotation was last time in late April 2018.

The zloty remains stable against the main currencies given these circumstances. Increased demand for more risky assets (aimed at finding a positive rate of return in the times of low interest rates) favours the Polish currency. The EUR/PLN exchange rate was just below 4.40 around midday, and the USD/PLN exchange rate was about 3.68, which is just at the bottom of the last two years' quotations.

Today, there are no major events or macroeconomic publications planned that could increase currency market volatility, but this week does not have to be calm. In the following days, the data on US industrial and service activity will be delivered for August (PMI indexes from the ISM institute).

On Friday, the US Department of Labor will publish a report on the labour market for August. The latest macroeconomic data from the US market may slightly increase expectations for positive readings also this week. Therefore, we can observe significant fluctuations of the dollar, and consequently, movements on the broader currency market, especially at the end of the week.

Strong data from the US could potentially strengthen the dollar and weaken the zloty basket. However, their impact could be limited by the narration about low interest rates for a longer period than previously expected which weakens the dollar.