Interest rates in the Islands unchanged, the pound appreciates (Daily analysis 30.01.2020)

The Federal Reserve and Jerome Powell do not surprise. The dollar's appreciation is stopped, and the EUR/USD exchange rate remains above 1.10. The Bank of England leaves the interest rate unchanged, somewhat surprising the market with more votes in favour of keeping the rates. The pound appreciates - the GBP/PLN pair is about 5.10.

Positive signals from eurozone

Yesterday's statement by the Federal Open Market Committee (FOMC) and the press conference of its President Jerome Powell did not bring any fundamental changes that also were not expected. Powell highlighted that the inflation target of 2% was to be reached. According to the FOMC, inflation could rise slightly closer to the target in the coming months, given the low base last year. The dollar volatility increased somewhat around these events.

The statement was definitely not hawkish. And it couldn't be, given the lack of inflationary pressure. Therefore, there was no unexpected impulse for the dollar's appreciation. The EUR/USD quotations moved somewhat away from the 1.1000 boundary, and in the morning levels close to about 1.1020 were observed. These are not changes that could suggest that there will be a reverse of the dollar appreciation trend seen in recent days. Mainly since in the afternoon, the preliminary data on the US growth pace in Q4 will be published, which may introduce even more volatility into the dollar's quotations.

Further data are coming in from the eurozone and they indicate a somewhat faster increase in economic activity. Yesterday, GfK readings of the sentiment of German consumers surprised positively, as well as an upward revision of Germany's GDP growth forecasts for 2020. Today's sentiment index readings by the European Commission have also exceeded expectations. The aggregate index of consumer and business sentiment in January rose to 102.8 points, i.e. by 1 point above expectations and to its highest level since August.

Sentiment in the industrial sector had a particularly significant impact on the growth of the overall growth level, and this may support the arguments about the improvement of the eurozone, where industry reported the most pronounced declines in activity. The impact of these data on euro quotations was limited today, but the readings are another element illustrating the economic situation in the coming months. And it is slowly becoming brighter.

Zloty below in red and pound in green - the result: 5.10 PLN

Today, the zloty moved within a limited fluctuation range against main currencies. This is supported by the relative stability of the dollar observed in the morning. However, the Polish currency remains rather weak compared to recent days.

The EUR/PLN exchange rate continues to move between 4.28 and 4.29, the upper limit of the last six weeks. However, significant fluctuations were observed in the case of the pound. The GBP/PLN exchange rate rose to nearly 5.10, the highest level since mid-December, following the Bank of England's statement and press conference of Mark Carney, its Governor.

The BoE has lowered its GDP growth forecast for Q4 to zero, also cutting growth prospects. The Bank also forecasts inflation below the target by the end of 2021. Interest rates have been left unchanged. Whether or not they will be changed has been debated in the market, with the probability of strong fluctuations in recent weeks. However, since last week, after better-than-expected labour market data and PMI, these chances have dropped significantly, and the consensus indicated no change.

What surprised the market today, however, was the distribution of votes for keeping rates unchanged. A 6:3 proportion was expected, but 7 members voted for no change and 2 for a cut. This is somewhat more hawkish, which caused the yields of British Treasury bonds to rise and, as a result, the pound to appreciate. With the globally weaker zloty due to the relatively strong dollar and the anxiety of the Chinese virus, the GBP/PLN exchange rate may now remain above 5.00 in the coming days or even weeks. It should also be remembered that despite the economic slowdown and the upcoming negotiations on a trade agreement with the EU, the pound remains the most undervalued of the major G10 currencies.