Daily analysis 19.01.2018

Which changes are expected by economists in the ECB's monetary policy? Weak data from the British economy. The zloty lost slightly in relation to the euro and the franc. In the afternoon, industrial production readings and retail sales from Poland will be published.

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

• 2:00 p.m.: December's industrial production and construction production from Poland (estimates: 3.5% YOY and 11.6% YOY, respectively),
• 2:00 p.m.: Retail sales from Poland for December (estimate: 8.6% YOY),
• 4:00 p.m.: January's consumer confidence in the USA according to the University of Michigan (estimate: 97 pts).

Constant dollar weakness

Morning EUR/USD quotations moved between 1.2250-1.2300 and were close to three-year-highs. This is mainly due to the dollar’s weakness. The euro did not appreciate nor incur any losses in relation to the franc, and moved between 1.1750-1.1800 to 1.1700-1.1750.

Currency behaviour could even be connected to the discussion in Congress on extending funding for federal institutions. In recent months, the debt limit has been increased several times in order to prevent a so-called "government shutdown", i.e. the closure of some federal institutions due to a lack of funding.

Despite the fact that the Republicans hold a majority in both the House of Representatives and the Senate, 60 (out of 100) votes are needed in Congress’ upper chamber in order to extend the functioning of certain institutions until mid-February. Therefore, the support of Democrats is needed. Theoretically, this is a technical process with the last real shutdown taking place in 2013. However, the current broad discussion on immigration issues may lead to a repeat of 2013’s situation. Moreover, Congressional elections will also take place in autumn (1/3 of the Senate and the entire House of Representatives will be up for grabs). Therefore, the assessment of risks and political opportunities will determine whether or not the Democrats will support the extension of funding.

Apart from the dollar’s situation, a survey conducted by Bloomberg is important. More and more economists believe that the ECB will decide whether they will announce an end date for the quantitative easing before September. Bloomberg agency posts that most of the respondents think that this will happen in June. The issue of interest rates will be modified in September and the quantitative easing will expire at year-end while the deposit rate will be increased in Q2 of 2019.

On one hand, this is a hawkish information as previous surveys had expected later changes in the monetary policy (therefore, maintaining a dovish stance of the ECB). On the other, if the market has misinterpreted recent minutes and is looking into the distant future, next week's clash with a hypothetically dovish ECB may mean a more pronounced weakening of the euro.

Weak data from UK

December’s retail sales readings from the UK failed to meet expectations. In annual terms, sales (excluding fuel and food) increased only by 1.3% YOY, which is half of what the market had expected. The ONS (National Statistics Office) statement showed that this year's consumers shopped earlier for Christmas and therefore, a lower growth rate was seen for December.

According to the ONS, long-term sales growth may slow down due to higher prices which limit the purchasing power of households. This may suggest that it will be difficult to expect further improvement in retail sales if real wage growth (currently rising below inflation) occurs. The pound slightly depreciated after ONS publications.

Zloty depreciated slightly

Today, the zloty has been depreciating since the beginning of the morning trade. These are not major changes, but the EUR/PLN is currently moving between 4.17 and 4.18, which is 0.01 PLN more than yesterday. It is difficult to provide a specific reason for the zloty’s depreciation, but perhaps investors are concerned about events in the USA (government shutdown in the previous paragraphs). Moreover, during the weekend there may be some reports from Germany (increasing or decreasing chances of a coalition) which also may cause a slight increase in risk aversion.

In the afternoon, the Polish Central Statistical Office (GUS) will publish readings from the Polish economy. The forecasts for industrial production (3.5% YOY) are not particularly high, but this is a result of the lower number of working days in December 2017 compared to the same month of 2016 (by 2 days). Retail sales data is less sensitive to the number of workdays, so its growth rate is expected to remain good (8.6% YOY). The data would have to deviate strongly from the consensus (e.g. industrial production around zero) for national issues to take the lead on the zloty. Therefore, the core scenario assumes a slight external pressure on the zloty, which may increase if the government shutdown takes place in the USA.