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Calm situation on the market won't last for long (Afternoon analysis 29.01.2019)

29 Jan 2019 16:44|Bartosz Grejner

The week started with limited changes in the currency market. However, today's series of votes in the British Parliament and tomorrow's other important events and incoming macro data will interrupt this peace.

Magic barrier of 5.00 PLN may be breached

For the first two days of the week, the calendar of significant publications and events (except for Brexit) was practically empty, which suggested the relatively small probability of changes in the currency market. The scenario was implemented yesterday, and we have observed the same today. The EUR/USD quotations remained above 1.14 level. Changes in the main currency pairs were in the range of about 0. % until the beginning of the New York trading session.

The stimulus to significant changes was few, but it may change this evening. At around 8:00 p.m., the British Parliament will start voting on amendments to the Brexit plan. Therefore, we can expect significant fluctuations in the pound in the evening. The final impact on the pound is hard to predict, although initiatives that are designed to lengthen the Brexit process (such as the Cooper-Boles amendment) have the potential to strengthen the British currency.

Such a scenario would be likely to lead to levels above 5.00 for the GBP/PLN exchange rate, which would be the highest since May 2017. Today, it oscillated between 4.93-4.96, i.e. in a similar range to Monday's one. The pound's appreciation potential is also limited. The chaotic Brexit option will not be eliminated, the British currency will not strongly appreciate and will not approach pre-referendum levels.

The zloty basket, just like on Monday, was stable today. Limited changes were also visible in the relation between other basic currencies and the zloty. However, fluctuations may increase on Wednesday morning, when data from both Europe and the USA will start to flow in. If the data points to economic spread between the two regions, this could have a negative impact on the zloty basket.

Tomorrow's preview

At 7:30 a.m., preliminary data on France's GDP in Q4 will be published. The median of market expectations indicates that the French economy has been developing at a rate of 0.2% in the last three months compared to the previous quarter and 0.9% compared to the same quarter in 2017. At 8:00 a.m., GfK will present the German consumer climate. The sentiment of both entrepreneurs and economists remains at a low level in Germany, so it is unlikely that consumer confidence will be much better (the market consensus assumes a decline by 0.1 pts. to 10.3 pts.).

At 11:00 a.m., Eurostat will publish the aggregated index of consumer and business sentiment in the eurozone. Since the beginning of last year, it has been gradually declining and reached 107.3 points in January - the lowest level in more than two years. The sentiment is likely to decline even more - the median of market expectations suggests a reading of 106.8 points.

The Federal Statistics Office (Destatis) will provide preliminary data on consumer inflation (CPI) in January at 2:00 p.m. The inflation rate is expected to fall to 1.6% per year (from 1.7%). After much worse than expected macro data from the eurozone recently, if tomorrow's data from Europe turns out to be below expectations, it may "remind" the market of the threat of economic slowdown, taking into account the growth in the equity market, euro valuation and slightly weaken the common currency.

At 2:15 p.m., the ADP will publish a report on changes in employment in the private sector. Although the market puts most attention to the Department of Labor's Friday's official report, ADP data can give an overview of what to expect. The correlation between them is not always ideal, but last month's very high ADP reading turned out to be even lower than the official data. The consensus assumes an increase of 178,000, and it is likely that the reading would have to be close to 300,000 in order to have a significant impact on the dollar.

The most important events scheduled for Wednesday, i.e. the statement of the monetary FOMC and the press conference of its president and head of the Fed - Jerome Powell. It is practically certain that interest rates will remain unchanged. However, the market expects a break in interest rate increases. Therefore, much will depend on the tone of the statement and the press conference. Outside the USA, we are witnessing a significant economic slowdown, a fact which may be emphasised once again. Such a strong effect of the slowdown has not been observed for the time being in the USA, although it is likely that FOMC members will prefer to wait and observe the incoming data from the US economy and on this basis they will decide on interest rate increases. The dollar is currently relatively weakened, so " too little dovish" message from the statement and from Powell may strengthen it.

29 Jan 2019 16:44|Bartosz Grejner

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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