Pound weakens (Daily analysis 9.01.2020)

No escalation of the US-Iranian conflict supports positive sentiment in the market. The dollar is the strongest since the end of December, the EUR/USD exchange rate tests the 1.11 boundary. The pound remained under strong supply pressure, depreciating after the comment made by the Governor of the Bank of England.

Donald Trump does not want the conflict with Iran to escalate?

Market participants do not believe in the worst-case scenario regarding the US-Iran conflict. The fear of escalation was also reduced by President Donald Trump himself, who during yesterday's press conference indicated that the US would not take retaliatory action for Iran's attack on two US bases (apart from additional economic sanctions). About an hour after the beginning of trading on the European markets, the main market indexes were increasing by about 1%, growing near the historical highs. However, the so-called safe havens, such as gold, the yen and the franc, were under supply pressure. A change in the market sentiment indicates that an increase in geopolitical tension is not a scenario currently on the table. The positive sentiment is also supported mainly by the very mild monetary policy of the major central banks in the world.

Alongside the positive sentiment in the broader market, the dollar continued to appreciate before midday. For the first time since December 27th, last year, the EUR/USD exchange rate fell slightly below the 1.11 level. According to Bloomberg, the dollar's exchange rate rose by about 0.3% in the morning. Today, the euro did not receive support after the mixed data from the German economy were published. According to data presented by Destatis, industrial production in November increased by 1.1% on a monthly basis but it fell by 2.7% on a yearly basis.

In both cases, the readings were above the market expectations, and also in both cases, the October data were revised upward by 0.7%. Yesterday, however, the data on orders in the industrial sector clearly failed to meet expectations, showing a mixed picture of German industry. This image was worsened by the publication of trade data, especially exports, upon which the German economy and industry are strongly dependent. Exports in November fell by 2.3% month-on-month, recording the strongest decline since April last year. This is not a sign of a rapid rebound in Germany's industrial sector. However, the market is already discounting the positive impact of the first phase of the US trade agreement with China and the potential positive impact on the first part of this year.

Weaker pound, stable zloty

There was a strong depreciation of the pound in the morning. The British currency even lost over 0.5% against the dollar. It happened after the comments of Mark Carney, the Governor of the Bank of England. Carney spoke at the opening conference in London on inflation targets. The GBP/USD quotations fell to about 1.3020, which is the lowest level since December 27th. The Governor of the British Central Bank pointed out that the economic rebound after resolving the uncertainty related to Brexit is not at all certain and that the UK economy is developing below its potential. Carney's statements were taken as dovish due to the comments that "the Monetary Committee is debating the benefits of stimulation in the short term" and that "the Bank of England has the equivalent of 250 basis points of monetary space". The prospect of monetary stimulation may limit the potential growth of the pound, depending on how the British economy will manage this year.

On the other hand, despite the globally stronger dollar, the zloty remained stable and was supported by positive sentiment dominating on the market. The EUR/PLN quotations range from about 4.23 to 4.25, i.e. within the range in which they have been closed since the beginning of the week. The situation is similar in the case of the Polish currency's value to most of the other major currencies, whose quotations record only limited changes and are closed in a relatively narrow range.

The USD/PLN exchange rate may react somewhat more strongly due to global movements on the dollar. Today, rising to around 3,8260, it has reached its upper limit since December 27th. Tomorrow's publication of a report on the US labour market will be important for this currency pair, but also the whole basket of the zloty. If the strong employment increases indicated by ADP on Wednesday were confirmed and supported by official data from the Labor Department, and the pace of salary growth would not disappoint or slightly exceed expectations, the zloty could depreciate a little if the dollar appreciates. However, potential losses seem limited even in such a scenario, as positive sentiment, including to emerging market currencies, would probably still prevail in the broader market.