Are we close to the end of a trade war? (Daily analysis 21.02.2019)

There is a growing likelihood of an agreement between China and the USA, and the risk of a chaotic Brexit is diminishing. Again there are weak data from the eurozone, especially from European industry. Data from Poland are average and have no significant impact on the zloty. The Polish currency remains weak, and euro costs 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.

Fed did not surprise

The "minutes" from the January Federal Reserve meeting were not a breakthrough. The decision to change the stance towards monetary policy (no suggestions for further rate hikes and the removal of balanced risks) received broad support. This could also be seen at a press conference at the end of January this year. There was no discussion among the FOMC members about cancellations of balance sheet reductions (what appeared at the conference), but it can be seen from the statements of Fed economists (first part of "minutes") that this topic is widely discussed and balance sheet reduction is not engraved in stone (especially in the case of the need to cut interest rates). As a result, "minutes" were neutral, which was visible on the US Treasury bond market, where the reaction to the publication was minimal.

The growing chances of extended trade negotiations on the USA-China line are positive. March 1st, which was supposed to be the key date, is now being forgotten. In addition, the planned high-level talks (with the participation of President Donald Trump) give hope that the customs conflict will be resolved in the coming months. This is good news for Asian economies and partly also for European economies.

It also seems that Brexit issues are going in the right direction. It cannot be ruled out that a breakthrough will occur in the coming days, as clear efforts to prevent hard Brexit and concessions (in the context of backstop) may happen relatively quickly.

Even if the vote on the modified Theresa May plan is not held at the end of February, it seems that the Brussels-London talks will be extended beyond the March 29th. Also in the case of a change of government or subsequent elections, the advantage of parliamentarians who want to avoid a chaotic Brexit is so large that, regardless of the new composition of the House of Commons, the worst case scenario is unlikely to happen. This should support the pound in the next few days.

Eurozone fails again

Preliminary eurozone PMI data for February do not show a clear rebound in the European economy after the disastrous end of 2018. In particular, the industry is surprisingly weak, where the manufacturing PMI index, for the first time in less than six years, suggests that the sector is shrinking.

According to Chris Williamson, head of economists at IHS Markit, the industry is negatively affected by the Brexit or trade problems on the USA-China line. In addition, there are issues related to the slowdown in the automotive industry, political uncertainty and general economic prospects. Williamson stresses that current PMI readings suggest GDP growth of only 0.1% in Q1 2019.

At the turn of 2017 and 2018, the index of new orders in the eurozone industry recorded several years highs and exceeded 60 points. Now, these values are 15 points lower, and we are starting to move around levels observed during the eurozone debt crisis in 2011-2012. The scale and pace of this slowdown are really surprisingly high. This is a bad omen for the coming weeks, especially in the context of the March meeting of the ECB and the new macroeconomic forecasts of the central bank.

Neutral data for zloty

After good data on wages for January or industrial production growth at the beginning of the year, today's readings of the Polish Central Statistical Office (GUS) were slightly weaker. Retail sales real growth amounted to 5.2% year-on-year. Although it was in line with expectations, we could expect a bigger rebound after a weak December. Construction production was worse than expected, but a year ago, in January, the growth was very strong, so now the high base from last year could weigh on readings. In general, the figures were not impressive, but with a weak economic situation in the eurozone, they still look solid.

In general, the impact of the data on the zloty was limited. The Polish currency remains weak, which is mainly due to low inflationary pressure and lack of prospects for rate hikes. This issue will remain unchanged in the coming days, so the chance of a rebound in the zloty remains weak, especially given the lack of better situation of the eurozone.