The European Commission will not start a case which would lead to financial penalties for Italy. The equity market appreciates, but the foreign exchange market is waiting for the Federal Reserve. The zloty is in good shape, and the potential dollar appreciation should not significantly weaken it.
ENG European Commission's mild attitude towards Italy (Afternoon analysis 19.12.2018) The European Commission will not start a case which would lead to financial penalties for Italy. The equity market appreciates, but the foreign exchange market is waiting for the Federal Reserve. The zloty is in good shape, and the potential dollar appreciation should not significantly weaken it.
EUR/USD still close to 1.14
While the market was waiting for evening events in the USA, positive information from Europe appeared. The European Commission (EC) will not start disciplinary proceedings against Italy regarding excessive deficit. Although this is a positive sign for the single currency and also for the equity market, which reacted with increases, the euro's response was very limited.
The EUR/USD remained practically unchanged - the exchange rate oscillated around the 1.14 limit. Investors are clearly waiting for a statement from the Federal Reserve in the evening (8:00 p.m.). A practically foregone increase in interest rates (by 0.25 percentage points), accompanied by lower macroeconomic projections of GDP or inflation than in the previous ones, could strengthen the euro.
The zloty remained in good condition against the basic currencies for the next day. This was caused by a drop in the price of crude oil (to approx. 46 USD per barrel WTI) and better than expected data from the Polish industry (an increase by 4.7% y/y in November).
The best scenario for the zloty would be a dovish interest rate increase by the Fed, accompanied by slightly worse macroeconomic projections and a lack of hawkish comments from Jerome Powell, the chairman of the Federal Reserve. In such a case, the zloty could, together with most of the currencies from emerging countries, appreciate due to a potential further weakening of the dollar.
In the opposite scenario, i.e. global dollar appreciation, the zloty could incur some losses, mainly in relation to the US currency. However, these losses could be limited due to the current favourable situation for the zloty (low oil prices, good macro data from Poland, easing the conflict between Italy and the European Commission). The main pair's exchange rates against the zloty move around the recent lows, i.e. the euro around 4.28 PLN, the franc 3.78 PLN, the dollar 3.75 PLN, the pound 4.75 PLN (at 3:00 p.m.). Even potential losses of 0.02-0.03 PLN in case of a strong dollar appreciation would not be significant in the context of the last few days.
At 10:30 a.m., the Office for National Statistics (ONS) will publish retail sales data in November. It can provide an indication of consumption, which is the main component of GDP. The median of market expectations indicates an increase in the core sales index in November (excluding vehicles and fuels) by 2.3% per year. Theoretically, this is important data in the context of pound valuation. The data may increase fluctuations in its quotations around the publication time. However, the data's final impact on the pound may be limited (unless it differs significantly, by about +/- 0.5 percentage points, from consensus). The topic that most determines the price of the pound is Brexit. This should not change in the coming weeks.
The Bank of England's publications at 1:00 p.m. after the Monetary Committee meeting may have a greater impact on the pound's quotations. The market consensus is that all 9 members will vote to keep interest rates unchanged. If one of them decides to vote in favour of an increase, this could strengthen the pound. No major changes are expected in the statement itself. Further monetary policy (and thus also the level of interest rates) depends to a large extent on the form that Brexit will take. This is probably what the Bank of England will signal once again.