Pound's appreciation more pronounced (Afternoon analysis 22.01.2020)

The dollar's value is increasing, and with it, the EUR/USD exchange rate drops to its lowest level in almost a month. The pound is also supported by a wave of strong data from the UK economy and a declining chance of rapid interest rate cuts. The zloty is stable, with the exception of the GBP/PLN exchange rate, which rose to 5.03 PLN.

Dollar's value chases the euro

Good sentiment continues. Shortly after the start of trading on the New York Stock Exchange, the main indexes climbed to new highs. In the afternoon, this trend may be supported by published data. House sales in the US rose by 3.6% month-on-month in December, the fastest since February last year, reaching 5.54 million (annualised), which was the highest value since February 2018. This is not the most significant macro reading from the US market, but it belongs to the list of arguments about the good condition of the US economy.

The dollar also reacted to the data in the afternoon. The EUR/USD exchange rate fell to about 1.1070 in the afternoon, the lowest level since December 24th. The scale of changes compared to yesterday's closing was not large (about 0.1%), but the dollar has slightly strengthened against the euro over the past week. A larger scale of changes can be observed on Friday, when IHS Markit will publish preliminary readings of PMI indexes for the eurozone, among others.

Wednesday dominated by pound

Today, the pound was appreciating. The GBP/USD exchange rate reached its highest level in two weeks, rising to around 1.3150, which also contributed to greater upward pressure on the GBP/PLN and an increase to nearly 5.03. This is the result of solid data from the British labour market, which were released yesterday, as well as today's CBI survey results, which signalled a strong increase in optimism among British businesses. The market is already pricing lower the chances of cutting rates in the Islands at the end of January (about 50%). If we look at previous weeks or months, pound quotations are characterised by high volatility, and the post-election calm and finalisation of Brexit may have slightly reduced these fluctuations. However, the UK has had a tough year of negotiations with the EU, as well as with the US (probably a bit easier), which will most likely support significant fluctuations.

The zloty basket, except for the explicit exception of the quotation in relation to the pound, remains stable. The Polish Central Statistical Office (GUS) published today slightly weaker data on industrial production in Poland in December: 3.8% annual growth, against expectations of 6.4%, which may suggest a slightly weaker end of the year in industry (earlier the construction industry showed a 1% decline). However, data from Poland have a limited impact on the zloty and give a mixed picture (e.g. higher inflation and stronger growth of trade surplus - positive for the zloty). The Polish currency should continue to be primarily influenced by external factors.

Tomorrow's preview

At 10:00 a.m., GUS will present data on retail sales in Poland in December. Today's published data on industrial production failed to meet expectations, just like the production in the construction sector a little earlier. The data from the Polish economy have currently a very limited impact on the zloty. However, a strong decline in retail sales, which may indicate a consumption trend in the economy, could weaken the zloty's basket slightly, given the weaker readings from industry and construction. The median of market expectations indicates an increase in sales by 7.3% year-on-year (6.0% in real terms).

The European Central Bank (ECB) will publish a statement after the two-day meeting at 1:45 p.m. Changes in monetary policy are not expected, so greater market attention may be focused on a press conference of Christine Lagarde, President of the ECB. During the conference, market volatility may increase. Currently, no significant change in the message from Lagarde is expected (not enough macro data from the beginning of the year), although during the last conference the President of the ECB turned out to be a bit more hawkish than the market expected. A similar tone from tomorrow's conference could theoretically strengthen the euro, but ultimately the changes should be limited.