Another set of weak data from Germany (Daily analysis 22.02.2019)

Readings from the German economy fail again. The extension of negotiations on Brexit is beginning to be the baseline scenario. The speeches from the members of central banks are important, but without a considerable significance. The zloty remains weak, and the euro is quoted around 4.33-4.34 PLN.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• A lack of macro data may noticeably impact the analyzed currency pairs.

Limited changes

Movements on the main currency pair are microscopic and have been around the 1.1350 boundary for the last few days. The pound is slightly depreciated due to Brexit, but the market is still not taking very seriously (rather rightly) the risk of a chaotic exit from the EU.

The EU is signalling that the negotiation period can be extended by about 3 months (but not beyond the date of the EP elections scheduled for 23-26 May). This is beginning to be the baseline scenario for the market. During this time, an agreement will probably be reached. Moreover, during the summit of the Arab League in Egypt this weekend a meeting between Prime Minister Theresa May and the head of the European Council Donald Tusk is scheduled. It can be seen that the activity of the key politicians involved in the Brexit process has been high lately, so there is a growing chance of avoiding an unordered exit.

Extending the negotiation period alone does not have to be great news for the pound, but trying to neutralize the backstop issue a few months before the new deadline is already a step forward that will help rather than harm the sterling.

A series of weak data from Germany

Black series: it's hard to label the consecutive weak data from Germany differently. The moods of German entrepreneurs measured by the Ifo index dropped from 99.3 points to 98.5 points in February. This is also the lowest reading in over 4 years. The sub-index of expectations (for the next 6 months) has further decreased. Currently, it is at the level of 93.8 points, i.e. 6-year lows. It is also close to the lowest values observed during the eurozone debt crisis in 2011-2012. At that time, the lowest value was 92.8 points. For comparison, a little over a year ago, Ifo's expectations reached 103 points.

Ifo President, Clemens Feust, in his comment on the data, wrote that business surveys and other indexes suggest that GDP growth could reach 0.2% in Q1, 2019. Equally low expectations were presented yesterday by the IHS, which publishes the PMI indexes.

The German economy, and therefore, also the European economy and Poland may have serious problems. The catastrophic second half of 2018 in Germany, where GDP fell by 0.2%, and the very weak start this year increases the risk of stagnation not only in Germany but also in the eurozone as a whole, especially as Italy is in recession and France is not able to get out of the initially rather trivial problem of protests of "yellow vests". Without a quick solution to Brexit and improved sentiment in the global economy (e.g. by resolving the customs conflict between Beijing and Washington), it can be expected that the problems in the eurozone will continue to exist and that populist groups will have a good result in the EP elections. This may keep the euro at a low level for a long time.

Zloty still weak

The zloty remains weak. The euro is in the range of 4.33-4.34, the dollar and the franc are close to 3.83. There are no particularly important macroeconomic readings in the following hours, but important members of the Federal Reserve (deputy head of Clarida and John Williams, the Chairman of the New York Fed) are expected to give their speeches in the afternoon. Mario Draghi, head of the ECB, will also speak in the afternoon.

The speeches may be important in the context of moods in central banks, but there is little chance that they will cause dramatic movements in currencies. The ECB will probably seek to withdraw its suggestion of rate hikes, but the Fed will maintain a 'wait-and-see' attitude. As a result, the zloty should remain weak, but the deepening of the last lows is unlikely to happen.