Pound appreciates, zloty remains weak (Afternoon analysis 21.02.2019)

In the last two days, there have been many signals from both the US and the eurozone, but in the end, the EUR/USD quotations are practically unchanged. On the other hand, the pound appreciates - the market apparently (rather correctly) does not believe in a hard Brexit. Neither good data from the Polish economy nor a relatively weaker dollar or an improvement in sentiment on the equity market help the zloty.

EUR/USD without any change

Although volatility in the currency market has increased after the publication of the minutes of the last FOMC meeting yesterday, changes in the dollar are ultimately limited. The macroeconomic data published today from both Europe and the USA did not give a clear picture. The eurozone's PMI indexes were better than expected in the services sector and, on the other hand, once again disastrous for the industry.

The US Department of Labor data on the number of initial jobless claims was by 4,000 better than market expectations and amounted to 216,000. Orders for durable goods increased by 1.2% per month in December, 0.4% above expectations. However, the slightly more significant base reading, excluding transport orders, increased by 0.1%, i.e. by 0.1 percentage points below expectations.

The jobless claims and durable order data in the industrial sector, which are already relatively outdated, is likely to be of limited impact on the dollar. Today, the EUR/USD fluctuations practically coincided with those of yesterday and ranged from around 1.1320-1.1370 (4:00 p.m.). The main currency pair is still affected by two opposing forces, which prevent a stronger movement in one direction or the other. These are the dovish attitude of the Fed and weak data from the eurozone, which increasingly lead to the likelihood of an increase in interest rates this year to 0.

The relative weakness of the dollar and the euro help the pound. The market is very confident that an agreement will be reached with the EU. The risk of a hard Brexit is also limited. In the event of a greater role of the British Parliament over the process or even new elections, supporters of not leaving the EU chaotically have an advantage.

As a result, the GBP/USD exchange rate moved today close to yesterday's highs, i.e. just below 1.31. Maintaining relatively high levels at GBP/USD means that the pound's valuation in relation to the zloty remains close to 5.00 PLN. On the other hand, the Polish zloty's basket remains weak even despite solid data on wages, industrial production and retail sales. The lack of prospects for interest rate increases, relative to other countries in the region, clearly does not help the zloty. A significant improvement in the situation on the equity market since the beginning of the year and the lack of dollar appreciation are factors that should theoretically favour the zloty. If they, combined with good data from the Polish economy, are not able to support the zloty, the chances of its rapid appreciation are currently very limited.

Tomorrow's preview

At 8:00 a.m. Destatis will publish data on the growth pace of German GDP in the Q4. This will be the second reading, so significant differences should not be expected. However, given the stronger than expected slowdown in both Europe and Germany or the mixed PMI indexes published today from both German sectors, GDP data may have a relatively large impact on the euro if they differ from market expectations. Especially as the German economy was in stagnation in the Q4, and it developed at an annual pace of only 0.9%.

Two hours later the Ifo institute will present the sentiment index of German entrepreneurs. It fell gradually as the economy slowed down and in January it reached its lowest level in just over 2.5 years. The problems still faced by the automotive sector and weak industrial data (both hard manufacturing and soft (PMI)) suggest that the chances of a significant improvement in this index are limited. The market consensus indicates a further decline by 0.2 points to 98.9 points.

FOMC's Wednesday minutes have changed little in the context of interest rates, although they suggest that the reduction in the Federal Reserve balance sheet will end this year. This increased the volatility of the dollar, but ultimately the changes are small, as in the case of the US Treasury bond and equity yields, although in theory, this information should support the latter. Tomorrow's statements by Fed members may intensify fluctuations in the currency market. The first speech will be held at 2:15 p.m. and the last one at 7:30 p.m.