Data from the UK do not disappoint, Powell in the limelight (Daily analysis 11.02.2020)

The British economy developed in December at a faster pace than expected by economists - the pound may appreciate somewhat. Jerome Powell's speech before the US Congress may increase market volatility. The EUR/USD exchange rate is close to its lowest level since May 2017.

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

• 4:00 p.m.: Jerome Powell's speech, Chairman of the Federal Reserve, before the US Congress.

Solid December for British economy

In the morning, a series of macroeconomic data from the British economy was released. Market attention was focused on reading the GDP growth pace, as the data a month ago disappointed the market's expectations. This time it did not happen. Although in quarterly terms the GDP remained unchanged in Q4 (in line with the consensus), but the 1.1% year-on-year growth was by 0.3 percentage points higher than the market had expected. In terms of the growth pace of the UK economy, December alone positively surprised with an increase of 0.3% compared to a decrease of 0.3% a month earlier.

December, in turn, was weaker for the industrial sector. This was in line with a trend that was also observed in other developed European economies in the last month of last year. Industrial production fell by 1.8% year-on-year, recording a 1 percentage point decline deeper than expected, and the November decline from 1.6 to 2.5% was further revised downward. In addition to GDP data, the overall picture was improved by foreign trade readings: the trade balance showed a surplus of 0.845 billion GBP in December against an expected deficit of 10 billion GBP. Services and construction indexes were also slightly above expectations.

Pound moves away from dollar

Concerns about the condition of the British economy may have decreased slightly, which supports the pound somewhat since this morning. The GBP/USD fell below 1.29 yesterday, and after reaching new lows from the end of November, it rose to around 1.2942 today following the publication of a series of data and may continue to move around 1.30 later in the day. Much will also depend on the dollar's condition, which has been clearly appreciating in recent days, particularly the euro. The euro has been under supply pressure following weaker industrial production data from Europe's largest economies.

Until midday, the EUR/USD quotation was just above 1.09, marking the new lowest value of the euro against the dollar since early October last year. It is also already the lower limit of quotations since May 2017. Its exceeding (about 1.0880) could potentially open the way for further strengthening of the dollar. Much depends on the tone of today's speech by Jerome Powell, Chairman of the Federal Reserve, before the US Congress. Statements that may suggest a stronger desire to lower interest rates if the virus has a strong economic impact could weaken the dollar somewhat. However, one should not forget about the disproportion between the condition of the US and eurozone economies, which affects the greater flow of capital overseas. These may be depicted to a slightly greater extent on Friday when the GDP data for the Q4 from the eurozone are known.

Can the Fed's Chairman depreciate the zloty?

Data on Poland's GDP for Q4 will also be available. The consensus is minus 0.1%, month-to-month. However, given the lower-than-expected growth for the whole of 2019, it will most likely have a limited impact on the zloty. The Polish currency now depends more on external factors. A good sentiment on the broader market, reflected, among others, by historical records on US or European markets, supports an increased level of risk appetite, which also has a positive impact on the zloty.

The EUR/PLN exchange rate dropped below 4.26 today, i.e. to the lowest level since last Thursday, while the USD/PLN rate continues to oscillate around 3.90. The important events for the zloty will be today's and tomorrow's statements made by Jerome Powell before the Congress, as well as further development of market sentiment. If Powell does not make the mild message about monetary policy expected by the market, the dollar may continue to increase and negatively affect the zloty. On the other hand, there is a very optimistic sentiment in the equity market, which largely underestimates the coronavirus threat. A potential depreciation of the world's major equity indexes could also weaken the zloty against the main currencies.