Good data but zloty is still weak (Daily analysis 20.02.2019)

The dollar is slightly weaker before the publication of the minutes from the last Federal Reserve meeting. There are further talks on the Brexit in Brussels. Good data on industrial production for January from Poland. However, the zloty remains weak, and the euro exceeds the 4.34 PLN boundary.

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

• 8:00 p.m.: Minutes from last Federal Reserve meeting.

Slightly weaker dollar

Compared with yesterday's afternoon, the dollar index (DXY) is weaker by about 0.4%. A similar weakening of the US currency is visible in relation to the euro, which is equivalent to an increase of 50 pips per the EUR/USD pair and a trading level at about 1.1350.

The dollar weakening is probably mainly caused by a drop in government bond yields. After Monday's break in trade due to the US holiday, we can observe drops by several basis points over the entire length of the yield curve. Additionally, on bonds maturing in 2 years there is a decrease below 2.5%, and on bonds maturing in 30 years below 3.00%. Investors may be afraid of more dovish signals from minutes after the January Federal Reserve's meeting.

Three weeks ago, the Fed suggested that we should not expect any further tightening of monetary policy. In addition, despite earlier announcements that the central bank's balance sheet will continue to decrease, this process may be stopped. Probably in the minutes we will see a lot of arguments in favour of the lack of rate hikes, which may sustain the very mild tone of the already known statement or conference.

On the other hand, a large part of this information is already calculated in prices, so it will be difficult to be surprised in any way. There should be no discussion about interest rate cuts, especially as the average expectations of FOMC members in December were still predicting two interest rate increases - 25 basis points each. Therefore, minutes may be negative for the USD, but they should not cause a strong wave of dollar depreciation.

However, the pound's situation is getting more and more interesting. Since yesterday, the British currency has strengthened to both the euro and the dollar. Investors still expect that politicians will finally reach an agreement in the context of the EU's exit deal or the negotiation period will be extended.

If this fails, the British Parliament will take the initiative and then an agreement will be reached. It seems that this scenario has a good chance of being implemented, but politicians love drama in such matters, so it is not excluded that this will be an agreement worked out in the last minute. However, the market is also aware of this and for quite a long time so it will try to believe in the baseline scenario, which reduces the risk of weakening the pound in the coming days, even if a chaotic Brexit becomes more and more likely.

Production data do not help

The market has a clearly negative attitude towards the zloty. Despite solid growth in industrial production in January (by 6.1% year-on-year) and manufacturing (by 5.3%), the zloty weakened and shortly before midday it was quoted above the 4.34 boundary.

The Polish currency is not only weak in relation to the euro, the franc or the dollar, but also to the forint. The PLN/HUF pair is approaching the 73.00 boundary, which means that the Hungarian currency is the strongest for over a year. For the time being, the zloty's weakness remains the baseline scenario, especially as today the NBP President Adam Glapinski said in a speech in the Polish Chamber of Commerce that (according to PAP): "If there was a catastrophic downturn, we still have space [for interest rate cuts - PAP], of course". In other economies of the region there is rather a discussion about tightening of monetary policy, therefore the pressure on the zloty may still be observed.