Chances for rate hikes increase (Daily analysis 17.01.2020)

Another set of data from the UK economy is below expectations - retail sales grew at the slowest pace in December since the end of 2017. Contrary to this, the Chinese economy was performing better at the end of the year than expected. The dollar is strengthening, and in the afternoon, important data from the USA will be available.

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

• 3:15 p.m.: Industrial production in the USA in December (estimates: a drop by 0.2% month-on-month).
• 4:00 p.m.: Consumer sentiment index in the USA in January (estimates: 99.3 points).

EUR/USD again close to 1.11

Friday started with positive sentiment. In the early morning hours, a set of macroeconomic data from the Chinese economy was published. They exceeded market expectations, although not significantly, but it was enough to support sentiment in the broader market. This, in turn, allows the main stock indexes in Europe (and futures contracts in the USA) to remain at historic highs.

China's GDP growth pace was 6.0% on an annual basis in Q4, in line with expectations. On a quarterly basis, expectations were exceeded slightly (by 0.1 percentage point), and the growth amounted to 1.5%. Industrial production increased slightly more in December. Its growth by 6.9% by 1 percentage point increased above the predicted level and at the same time was the fastest since March last year. Investments in fixed assets increased by 5.4% per year and retail sales by 8.0% - by 0.2 and 0.1 percentage points respectively. The GDP growth pace in the whole of 2019 amounted to 6.1% year-on-year and was the lowest in 29 years, but the optimistic end of last year may give hope that the slowdown this year will not be as notable as one could expect.

British people are not mad about shopping

The data from the British economy were not so optimistic. Retail sales in December grew by only 0.9% per year. Excluding highly volatile vehicles and fuels, sales increased by only 0.7% year-on-year. This is the slowest growth since October 2017. This is not the first weaker-than-expected macro reading from the Isles, so the market valued the probability of a rate cut already at the end of January at around 73%.

The pound was under supply pressure after the publication of sales data: the GBP/USD quotations after reaching about 1.3118 (the highest level in 8 days) fell to about 1.3030. Until the Bank of England's meeting, we will get information about PMI indexes, among others, which may still modify the probability of interest rate changes. However, the growth potential for the British currency seems limited now.

The USA supports the dollar

Around midday, we also observed a further strengthening of the dollar. It was not strong, but after yesterday's moderate appreciation, the EUR/USD exchange rate rose just above 1.11 (yesterday afternoon it was still around 1.1174). This is a consequence of better-than-expected data from the US economy on retail sales and initial jobless claims, as well as a strong increase in business activity in the Philadelphia area.

In the afternoon, we will learn important data from the USA that could potentially reinforce this trend: industrial production in December and the US consumer sentiment index in January. The latter reading is unlikely to (significantly) disappoint, given recent events and the macroeconomic context. In general, sentiment has improved after the conclusion of the first phase of the trade agreement. However, we can expect an increase in volatility in the afternoon and potentially a further strengthening of the dollar if data - especially from industry - come as a positive surprise.

Zloty is slightly volatile but no worries!

The global appreciation of the US currency is putting some pressure on the zloty basket. The EUR/PLN quotation range has shifted to approx. 4.23-4.245, although the rates are still close to the year and a half lows. The zloty depreciated somewhat to the dollar, and the USD/PLN exchange rate rose to about 3.815, achieving its highest level since Monday. In a broader context, however, the levels are also close to the bottom line since last year's holidays. The afternoon data may introduce a little more fluctuations into the zloty's quotations, perhaps even weakening the whole basket. Still, the good condition of the Polish economy and positive sentiment on the global market should protect it from significant depreciation.