Expected victory with the unexpected majority (Daily analysis 13.12.2019)

The Conservative Party wins the UK elections with a remarkably large majority. The advantage with which it wins is the greatest since the Margaret Thatcher victory in 1987. The pound is gaining strongly, but there is still a lot of space for further appreciation and significant fluctuations.

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.: Retail sales in the USA in November (estimates: 5.5%, excluding vehicles 0.4%).

Election's results support the pound

The victory of the Conservative Party and the government of Boris Johnson in parliamentary elections constituted the basic scenario. What surprised the market participants positively, however, was the scale of victory, which was the greatest for the Conservatives since the 1987 elections, in which Margaret Thatcher achieved a 102-seat lead in parliament. After counting almost all the votes, Johnson won 364 seats, which gave his party a majority of 78 votes.

Today's election result also means 46 more seats in parliament for the Conservative Party than in the current configuration. In this context, it seems certain that the Brexit agreement reached with the EU will be finalised by the end of January 2020. Greater parliamentary dominance also helps to reduce the number of those in favour of 'hard Brexit' among the conservatives. They could potentially hinder negotiations on a trade agreement with Brussels (the current one is valid until the end of next year). The new composition of the parliament forms the basis for slightly more constructive negotiations with the EU, which may, however, be difficult and may last even a whole year.

Investors will no longer need to bother with potential difficulties in negotiating a new trade agreement and will soon focus on the implementation of a positive scenario for the economy and also for the pound. As a reaction to Johnson's victory, the British currency was appreciating strongly. Shortly after the publication of the preliminary results yesterday evening, the value of the pound against the dollar rose slightly above 1.35, the highest level since mid-May 2018. In the following hours, we have seen a rebound in this growth to around 1.335, but in the next few weeks, we can even see a return beyond the 1.40 boundary. An even more profound reaction was observed in the case of the EUR/GBP pair, whose exchange rate, falling to around 0.828, reached its lowest value since July 2016.

EUR/USD close to 1.12 level

The fact that the positive scenario was realised in the British elections translated into an increase in risk appetite, which contributed to strong growth in the equity market and improved general sentiment in the broader market. The Japanese currency, one of the so-called safe havens, was clearly depreciating. The USD/JPY exchange rate reached 109.7 around midday. This is the upper boundary of quotations in the last six months and a trigger for exceeding the key level of 110. The potential signing of the first phase of the trade agreement by the US President may result in the border being tested.

The removal of the risk factor regarding Brexit (under the Labour Party rule led by Jeremy Corbyn) had a negative impact on the dollar. The US dollar index (DXY) and dollar index according to Bloomberg fell to the lowest levels since July this year, and the quotations of the main currency pair, i.e. EUR/USD, increased to about 1.12, reaching a level not observed since August. The fact that the last press conference of the Federal Reserve head was relatively dovish does not help the dollar either.

Pound with the highest value since almost 3 years

The globally weaker dollar supported the Polish currency. The zloty was stronger in relation to the main currencies, i.a. the euro, the franc and the dollar. The EUR/PLN pair moved back to around 4.27 level, and the USD/PLN pair fell back to 3.82 boundary. Around midday, the CHF/PLN exchange rate was maintained below 3.90, the bottom level of the last month's exchange rate. Different trading was observed in the case of pound's quotations against the zloty. Just after the announcement of the elections' results, the GBP/PLN exchange rate rose slightly above 5.18, reaching its highest level since January 2017.

As time passed, we saw (converged to the pound's global behaviour) withdrawal to about 5.12, which was still the upper level for nearly three years. It is possible that in the coming weeks, the exchange rate may quickly exceed 5.20 if we observe a further appreciation of the pound on a global scale. However, it is necessary to be prepared for significant fluctuations in the pound's value, which may even result in the withdrawal of the entire increases earned by the British currency in response to the election result.

By Sunday, we will most likely know the outcome of additional duties on imports of consumer goods from China to the USA. The chances of their introduction seem to be very limited, after yesterday's positive reports from President Donald Trump himself, as well as later media reports on the possibility of reducing customs duties by 50%. Signing at least the first phase of the agreement by Donald Trump could strengthen the dollar, which in turn could weaken the zloty's basket.