Elections in Great Britain. Johnson's victory is becoming less and less certain (Daily analysis 11.12.2019)

A recent poll from the UK indicates that the Conservative Party's advantage is shrinking. The pound depreciates somewhat. Market participants are waiting for an evening statement from the Federal Reserve's monetary committee and a conference of its leader. The dollar is within the low volatility range, but it may increase significantly in the afternoon.

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

• 2:30 p.m.: Consumer inflation (CPI) in the USA in November (core index estimates: 2.3% year-on-year, 0.2% month-on-month).
• 8:00 p.m.: FOMC statement.
• 8:30 p.m.: Press conference of Jerome Powell, President of FOMC.

Negative scenario for the pound

The rally connected with elections in the Islands seems to be intensifying. According to the latest YouGov poll from Tuesday, Prime Minister Boris Johnson's and the Conservative Party's advantage is declining. Although he continues to lead with 43% of the vote against 34% for the Labour Party led by Jeremy Corbyn, his parliamentary majority has shrunk significantly. If the elections end as indicated by the YouGov survey, Johnson would have a parliamentary majority of only 28 seats, down from 68 according to the two weeks ago survey.

Looking at the trend in the surveys of both parties, in recent weeks a gradual narrowing of the conservative advantage over the labourists can be seen. The fact that today's key survey confirms this, given the countdown to the election, could not have had a positive impact on the market. The pound, in response to this new survey data, gave up part of its increases from yesterday evening. After reaching yesterday's highest level since the end of March (above 1.32), the GBP/USD quotations fell back to 1.31 today. As the hours went by, there was a slight rebound in declines, and at midday, the exchange rate oscillated around 1.3150. However, today's YouGov publication shows how much uncertainty surrounds the final election result, and the final majority (or its lack) in Johnson's party parliament may depend on single votes.

The so-called hung parliament, or lack of majority dominance, would most likely mean the end of Johnson's government and the coalition Labour Party governments led by Jeremy Corbyn. This is a definitely negative scenario for the pound, which is not currently valued in the British currency quotes. If it is implemented, even a few percent drops (and fluctuations) in the pound's value can be seen. The end of the Conservative Party rule would mean a return to the confusion regarding Brexit, perhaps a new referendum, which in the next few months could put additional supply pressure on the pound.

Until midday, there were no significant macroeconomic publications; therefore, market fluctuations were relatively limited. This does not mean that the rest of the day will proceed in such moods. One hour before the opening of the New York Stock Exchange session, the data on consumer inflation (CPI) in the USA will be announced. Their publication may extend the dollar's volatility. The main event of the day will be an evening FOMC statement and a press conference of Jerome Powell, FOMC chairman and head of the Federal Reserve. Interest rates will not be changed (it is almost certain). The message coming both from the written statement and from Powell himself will be important.

Last labour market data and consumer sentiment in the USA have far exceeded the expectations. It can be spotted by FOMC as well. However, there have been some weaker readings of ISM from industry and services which may limit optimism. Data from the euro area showed (at least in part) signs of an attempt to rebound from the economic slowdown, which may also lead to a slightly more hawkish message. The main risk factor for FOMC remains international trade and the continued customs war between the US and China. If this element of uncertainty were to be removed somewhat in the near future (the deadline of December 15th, for an agreement or new duties), the market could once again shift attention back to the macro and inflation data. As long as inflation remains subdued and the economy does not overheat and grow above potential, a broad discussion on the return of interest rates to growth will not resume. The market continues to value interest rate cuts (rather than increases) in the US over the next year. A slightly hawkish statement may modify this probability and potentially strengthen the dollar.

The evening may be marked by signified volatility

In the morning, the EUR/USD quotations moved from 1.1100 to 1.1080. However, such changes can be considered cosmetic during the day when the FOMC announcements and Powell's press conference await us. The low volatility of the main currencies and the lack of significant modifications on the broader market (equities, bonds, raw materials) supported the zloty's stabilization in the first phase of the day. The EUR/PLN exchange rate was in the range of approx. 4.28-4.29, and the USD/PLN rate oscillated around the 3.87 level. Increased volatility may come in the evening due to the Federal Reserve. If the tone of these events is perceived by the market as relatively hawkish ('relatively', because the Reserve will not indicate either a cut or a rise in interest rates), the zloty's basket could be subject to supply pressure. The EUR/PLN exchange rate may then increase to around 4.30 and the USD/PLN rate to around 3.90, if we observe a simultaneous return of the EUR/USD pair closer to the 1.1000 boundary.