Euro depreciates, zloty appreciates (Afternoon analysis 16.01.2019)

The market still believes in positive developments for the Brexit - the pound is in good condition. Concerns about the economic slowdown in the eurozone burden the common currency, but the zloty shows its strength in this situation.

EUR/PLN near 4.28

Huge defeat (432-202 votes) of the plan worked out by Prime Minister Theresa May, was finally adopted by the markets with moderate optimism. Uncertainty about the continuation of the Brexit after yesterday's vote is slightly greater than before, but market developments suggest that it considers the chaotic Brexit option - which neither the UK nor the EU wants - to be unrealistic.

These expectations are reflected in the pound quotations. The GBP/USD exchange rate during the session in Europe was moving (given the events) within a very limited range of fluctuations of about 1.284 - 1.289. This range may expand in the evening, when more active market participants in the US will be present and when the voting time (about 8:00 - 9:00 p.m. CET) on the vote of no confidence for the May government will also begin to come close.

This vote is likely to be won by the Prime Minister, but the pound may once again be subject to greater volatility. Moreover, there is no reason to suggest a relative calm during European session quotes: uncertainty about how the UK's exit (or not) from the EU might turn out will, by definition, cause the British currency to fluctuate markedly over the coming weeks and will be particularly sensitive to large movements in emerging media reports. Despite the potential chaos in the coming weeks, the outlook for the pound for the rest of the year is positive and could increase by 5-10%.

The zloty, on the other hand, was still very stable. The changes were limited, but moved towards a slight strengthening of the zloty. Although the fall in the EUR/USD quotations, combined with weak data from the eurozone and fears of growth, was most often negative for the zloty, we do not currently observe the implementation of such a scenario. The current market conditions support the zloty. The equity market is rebounding from the massive falls of last year, which improves general sentiment, and oil prices are still at a relatively low level (ca. 52 USD per barrel of WTI oil compared to ca. 77 USD at the beginning of October). This will have a positive impact on the contribution of net exports to Poland's GDP (which is a net importer of this raw material).

Weak GDP and industrial sector data of the largest European economies is in contrast to the one from the Polish economy. Admittedly, the PMI survey recorded strong declines (mainly due to the worsening of the general market sentiment), "hard" data on the industrial sector, retail sales or GDP growth exceed market expectations. As a result, despite concerns about the eurozone economy and the fall in the EUR/USD exchange rate, EUR/PLN quotations have moved closer to the level of 4.28, to the lower limit of quotations since the beginning of January. However, going beyond the level of about 4.25 - 4.35 would also require a good reading of core inflation, showing its upward trend, which is not currently observed. Core inflation, published today by the National Bank of Poland (NBP), amounted to 0.6% year-on-year in December, as expected. Apart from the vote in the British Parliament, there are no other important events planned for this afternoon. The zloty's quotations should stabilise in relation to the main currencies around current levels, and potential large fluctuations should be limited to the GBP/PLN pair.

Tomorrow's preview

At 11:00 a.m., Eurostat will present data on consumer inflation (CPI) in the eurozone in December. This will be the second reading, so significant changes are unlikely. The market consensus expects inflation to reach 1.6% per year, while the core index of 1.0%. The euro is currently weaker, after a series of dreadful data from the industrial sectors of the largest European economies and the lowest economic growth pace in Germany in five years. If core inflation falls below 1.0%, it may increase the supply pressure on the euro that was recently observed.

1:30 p.m., the US Department of Labor will publish a weekly report on initial jobless claims. The number of claims submitted after three weeks of growth in a row has recently fallen from 233,000 to 216,000. The market consensus suggests an increase to 220,000, although this is still very low. This data is rather secondary in terms of its impact on the US currency quotations, but another positive, better than expected reading may give another argument about the much better condition of the US economy compared to the eurozone and slightly support the dollar in relation to the euro.