May big defeat (Daily analysis 16.01.2019)

As expected, Prime Minister Theresa May lost yesterday's vote on the Brexit plan, she is also waiting for today's vote on the motion of censure. The pound, however, remains strong - the market believes in positive scenarios, although the risk of chaotic leaving the ranks of the EU has increased.

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

• 2:00 p.m.: Core inflation in Poland in December (estimate: 0.6% yoy),
• 2:00 p.m.: Core retail sales in the US in December (estimate: 0.1% mom).

A lot of options, a lot less time

The vote on the brexit plan in the British Parliament is already behind us. The rejection of Theresa May's plan with 432 to 202 votes was also the biggest failure of any government in Britain's modern history. Only yesterday, after the vote, Jeremy Corbyn, the leader of the Labour Party, said that he will propose a vote of no confidence. Parliament is due to vote on this proposal this evening. This time Theresa May will probably win the vote, although what exactly happens next isn't that certain.

May has exactly three parliamentary days, until 21st January, to present a "plan B". Virtually nobody wants a chaotic Brexit that could plunge the UK economy into recession. However, following yesterday's vote, both the negotiating position of Theresa May's government and that of the United Kingdom has been weakened. The time until the deadline for Brexit, i.e. 29 March, is looming ever faster, and the EU remains steadfast on the backstop concerning the Irish border - the main element of contention for British lawmakers.

Both the EU's chief negotiator Michel Barnier and German Chancellor Angela Merkel confirmed that they want an agreement with the UK, but after yesterday's vote it is the British who must take a step forward and say what what are the next steps. Basically any option is now on the table. However, 72 days is not much to develop a new plan given current events. So it is quite feasible that Brexit will be delayed to give both sides more time to reach an agreement, although this is also somewhat cumbersome to some extent. Parliamentary elections to the EU are planned for the end of May, and no Brexit by that time means that the UK will participate in them.

On the one hand, after yesterday's vote, the chances of a chaotic exit from the EU has increased, but the probability of more positive solutions has increased as well: an agreement with more concessions, no referendum or even revoking Article 50, which would mean that the UK would remain in the EU. The latter two options (for the time being) have been excluded the government. Given the market reaction, i.e. yesterday's appreciation of the pound and its strong condition today, the market seems to believe in this positive scenario.

Despite a strong dollar, the pound made up for virtually all the losses incurred in anticipation to the vote results and its value returned around the level of 1.29 USD. The pressure on the euro yesterday and the positive sentiment towards the British currency brought down the EUR/GBP rate to around 0.884 this morning European time, the lowest level since the end of November. Under the current circumstances, inflation figures for the UK are somewhat less important to the economy than usual, but a better-than-expected reading of core inflation may give additional support to the pound. Inflation, excluding energy and food prices, was up 1.9% year-on-year in December, 0.1 percentage points above the market consensus.

The market's position anticipating a rather positive scenario in the case of Brexit weakened the zloty in relation to the British currency. Although the GBP/PLN traded yesterday in a relatively wide range (approx. 4.78 - 4.85), it was not as wide as one would have expected and ultimately caused the exchange rate to rise to the highest level since the end of November, similarly to EUR/GBP.

Among the turbulent events associated with the Brexit, the zloty's basket has remained stable today, and changes in relation to the main currencies have been limited. The EUR/PLN rate recorded only slight deviations, but the movement of its quotations in the area below 4.29 brought it closer to the lower bound we have been observing since the beginning of the year. In the afternoon, we will also learn about what the core inflation in Poland was in December and about retail sales in the US. Given, however, the relatively high resistance of the zloty to a decline in the value of the euro (EUR/USD below 1.14), the aforementioned publications should have a limited impact on its value.