Calm Monday but not for pound (Afternoon analysis 11.03.2019)

Mixed data on US retail sales are neutral for the US currency. The high volatility of the pound we are seeing today is likely to increase even further in the coming days.

EUR/USD close to 1.1250

Monday did not bring any reshuffling on the currency market. The most important events are planned for tomorrow and the following days. There will be, among other things, data on inflation in the USA, as well as voting on the Brexit. The EUR/USD quotations oscillated around 1.1250, with a very limited fluctuation range of about 1.1220-1.1260 until the beginning of the New York trading session. The Census Bureau data on US retail sales in January changed little in this context.

Increases in both its headline and core indexes (excluding vehicles and fuel) exceeded expectations and amounted to 0.2 and 1.2 per cent per month, respectively. This positive information for the dollar was somehow "balanced" by the revision of disastrous December data. Deep, the biggest drop in sales in 9 years, turned out to be even more pronounced (by 0.4 and 0.2 percentage points, respectively). After publication, the exchange rate remained around 1.1250.

The lack of dollar appreciation and good sentiment on the equity market supported the zloty, which was a bit stronger today. The EUR/PLN quotations fluctuated around 4.30, the stabilisation level of the last six months. The day before the vote in the British Parliament, the pound was subject to high volatility. The British currency in relation to the dollar changed in a few hours from -0.5 to +0.8 per cent, reaching nearly 1.31 in the afternoon. Taking into account that there was no new information on the Brexit, the pound is most likely to pare some of the losses incurred in recent days. The globally stronger pound today has also translated into an increase in the GBP/PLN exchange rate from 4.95 back above 5.00. In the next three days, the market faces three votes in the UK, so the fluctuation range may increase even further.

Tomorrow's preview

At 10:30 a.m., the Office for National Statistics (ONS) will publish data on production in the industrial and construction sectors in January, GDP growth pace and the balance of international trade. Given the large pound fluctuations, these data could further increase them. In the current situation, their impact may ultimately be limited. This week's vote on the Brexit will take place in the British Parliament and will be the main stimulus to the pound's quotation. The first one is tomorrow, probably in the evening. They will concern the agreement reached by the Theresa May government. This plan is the same on the most important issue (the backstop of the Irish border) as the original one, on which the vote was unsuccessful. This is also the scenario this time. After the previous vote, the pound, because it reached new lows, has even started to appreciate, and this cannot be ruled out this time. In recent days we have seen a clear reduction of the pound, and the most likely solution now is to extend the Brexit process with the agreement, which in turn, should support the pound's appreciation to the end of the year in the range of 5-10 per cent.

The Bureau of Economic Analysis (BEA) will provide consumer inflation (CPI) data for the US in February at 1:30 p.m. Although this is not the type of inflation taken into account in macroeconomic projections (PCE inflation), after Friday's labour market report it may give investors more information about current price trends in the economy. The average wage growth rate in February was the highest in a decade (3.4% year-on-year). If the core inflation index (excluding energy and food prices) exceeds the market consensus level of 2.2% year-on-year, the probability of rate hikes in the second part of this year will increase. This could contribute to an increase in the yield of the US Treasury bonds and, as a result, to the dollar appreciation.