Pound's strong depreciation (Daily analysis 13.01.2020)

Data from the British economy are not enthusiastic. A drop in GDP growth pace by 0.3% in November means that December data must turn out to be much better to avoid a recession in Q4. The zloty remains stable, the EUR/PLN exchange rate is quoted in the range of 4.23-4.24, and the GBP/PLN exchange rate is the lowest since November - around 4.94.

More arguments to cut interest rates

The pound is under the supply pressure at the beginning of the week. The British currency depreciated after the publication of a series of economic data. The GBP/USD fell below the key level of 1.30 for the first time since December 27th. The 1.2960 level recorded in the morning was about 4% below the post-election peak of the second week of December. The UK economy shrank unexpectedly in November by 0.3% monthly (no changes were expected). On the other hand, the three-month period from September to November, which recorded an increase of 0.1% compared to the previous three months, surprised positively, although a decrease of 0.1% was expected (the effect of an upward revision for the previous months).

The data on industrial production in November did not come as a positive surprise either. The 1.2% monthly decrease (and 1.6% annually) was greater than expected. This was mainly due to its most important component, i.e. manufacturing, which fell by 1.7% month-on-month. The services in November also did not impress, and the drop by 0.3% month-on-month was 0.3 percentage points higher than expected. Practically all October data have been revised upward, but the most important seems to be now the GDP reading. The 0.3% drop in November means that in order to avoid a recession in the last quarter, the December economic growth pace must be around 0.1-0.2%.

This may support the Bank of England's argument for interest rate cuts this year. Its head Mark Carney himself suggested that the BoE has room for cuts if economic data deteriorate. At the end of the month, there will be the last meeting with Carney as Governor of the UK Central Bank, and although no rate cuts are expected at that time, more members (last time there were two) may vote to cut them. This would probably increase the supply pressure on the pound, but by then we will know other important data from the British economy (including inflation, retail sales, PMI indexes), which may change this view somewhat.

Pound's rate the lowest since November

As a consequence of the global weakening of the pound, the GBP/PLN exchange rate fell to around 4.94, the lowest level since November 8th last year. The discussion about lowering interest rates in the Islands will most likely put negative pressure on the pound, which in turn should support the GBP/PLN exchange rate staying below the 5.00 threshold. The zloty also remains in good condition - the EUR/PLN exchange rate fluctuates between 4.23 and 4.24, i.e. close to the lower boundary of quotations from the last year and a half. We are not currently observing a strong appreciation of the dollar (EUR/USD quotations remain slightly above 1.11), and the sentiment on the global market is dominated by positive sentiment (reduction of geopolitical tension), which should support the zloty in relation to the main currencies.