Strong labour market on the British Isles (Daily analysis 19.02.2019)

Limited changes in the main currencies. Strong labour market in the UK despite the slowdown in Europe and weak data from British industry. The zloty stabilised at low levels. The euro is in the range of 4.33-4.34, and the franc and dollar are above the 3.80 mark.

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

• A lack of macro data may noticeably impact the analyzed currency pairs.

Strong labour market on the British Isles

The last hours were not especially exciting as far as the main currencies are concerned. In addition, the US market was closed, so there were no signals from the debt instruments market either. Investors are waiting for additional impulses connected with foreign trade, as well as with the ECB's attitude to monetary policy and reports from the Fed or the Brexit.

The positive message on China-US relations is now reduced by concerns about the wider dispute between the EU and the US (the EU would probably respond with counter duties to the US trade restrictions on the automotive industry). The ECB sends dovish signals, but no decision will be taken before the March meeting (unless leaks appear in the press). In general, the topic is a little bit frozen. We have to see what PMI readings will appear in February (publication on Thursday). This may be one of the most important figures this month, as they will show whether there is a chance for a recovery after the terrible end of 2018 (recession in Italy, stagnation in Germany).

In the context of the Fed's monetary policy, the so-called minutes from the January meeting of the FOMC may be interesting (publication tomorrow). This may rather be negative information for the dollar, given that the discussion on withdrawal from earlier announcements of increases had to be supported by broad arguments suggesting a slowdown in the economic situation and the fading of inflationary pressure. On the other hand, this hypothetical weakening should not be dramatic, the message after the January FOMC meeting was dovish, and this issue is to a large extent calculated in the dollar.

In the context of the Brexit, there is a political power struggle (so far the market is practically insensitive to new reports). In the morning, it was announced that Prime Minister Theresa May and the head of the European Commission Jean-Claude Juncker would meet. At the same time, shortly afternoon Margaritis Schinas, the spokesman of the European Commission, said that the initial agreement would not be renegotiated. The market can still be calm until the last days of February. Then we can have an increase in nervousness on the pound if the extension of the negotiations is not clear. Ultimately, however, the pound should benefit from events in the coming months, as both sides want to avoid a chaotic Brexit.

Moreover, it is worth paying attention to other good data from the labour market in the UK. Employment in relation to the population increased to the highest level in history (since 1971) and amounted to 75.8%. In turn, the inactivity rate (the percentage of people who do not have and do not look for work) fell to the level of 20.9% and is also the lowest in less than half a century. Unemployment has been at its lowest level since 1975 and amounts to 4.0%. Wages are rising by 3.4%, which means that the growth pace of the report from a month ago is maintained at its highest level for a decade.

However, the labour market is the only clear point in the British economy. Recent data from industry, GDP or foreign trade show a number of problems in the UK, and the spectre of a chaotic Brexit could also weaken the pound rapidly, even if it is finally clearly stronger than it is now when London and Brussels reach an agreement.

Zloty still weak

The Polish currency remains weak, both in relation to the euro or the dollar, as well as the forint or the Czech koruna. There are no arguments for this situation to change. The region is under pressure to tighten monetary policy (Hungary, the Czech Republic), and in Poland, there is not much chance of it. On the other hand, the economic slowdown in the eurozone or still a relatively strong dollar has a negative impact on the zloty.

Relatively good data (although the key ones will be published on Thursday - industrial production and retail sales) do not help the zloty. Wages in the corporate sector increased by 7.5% year-on-year (estimates: 6.9%), which shows that companies generate strong demand for employees and are willing to further increase wages. If on Thursday production and sales (in real terms) exceed 5% growth (year-on-year), then a slight strengthening of the zloty can be expected. However, due to the MPC's mild monetary policy, these increases may be limited, and the zloty will probably remain weak for the next few days.