Strong pound’s volatility (Afternoon analysis 11.01.2019)

Today, the pound noted significant fluctuations while awaiting the vote in the British Parliament. Inflation data in the USA is in line with expectations and will be important in the coming months in the context of the recent statement from the Federal Reserve. The scenario for the zloty remains the same - stability.

EUR/USD again below 1.15

During the last session this week, there were significant fluctuations in the pound. The Office for National Statistics (ONS) published a set of data from the British economy this morning, but the pound's response was limited. The ONS data showed that, in line with the trend in other large economies in Europe (Germany, France, Italy), there was a greater than expected decline in industrial production. It decreased by 1.5% per year, compared to the 0.7% drop expected. The foreign trade deficit also turned out to be higher, which also in November amounted to 12.02 billion GBP, by 0.8 billion above the market consensus. A positive aspect of today's macroeconomic publications was slightly higher (by 0.1 percentage points) month-on-month GDP growth of 0.2%, which amounted to 0.2% in November.

In the morning, there were reports from the Evening Standard that Brexit could be postponed until after March 29th. This has led to a significant increase in the pound. The GBP/USD quotations went up from around 1,275 to nearly 1,284. Although this information was denied a moment later by the government spokesman, the British currency maintained most of the increases, at least until 3:00 p.m. (CET). Uncertainty surrounding the UK exit process has recently led to a situation where the pound has acted more like the currency of emerging countries. The chances of changing this situation in the coming weeks are low.

For today was scheduled an important publication on Consumer Inflation (CPI) in December in the USA. However, data from the Bureau of Economic Analysis (BEA) turned out to be in line with expectations as regards the most important indexes. The headline inflation reading was 1.9% year-on-year, while the index excluding energy and food prices was 2.2%. As a result, the impact of the data on the dollar was limited. It should remain under pressure, given the more cautious tone of the Federal Reserve representatives' statements on future interest rate increases. They will largely depend on the incoming macroeconomic data from the USA in the coming months, especially on inflation, GDP and the labour market - and the dollar may react strongly to it if the data clearly deviates from expectations.

Data from the USA was in line with expectations, and the weakened dollar is still positive information for the zloty. For the most part of today, the EUR/PLN pair was quoted slightly below 4.30. Around 3:00 p.m., the USD/PLN pair was moving in the range of 3.72 - 3.73. However, in the afternoon, when the US investors started to be more active, the dollar started to appreciate. This was not a reaction to the aforementioned inflation data, but rather a rebound of some of the recent decreases in its value. The EUR/USD quotations fell from about 1.153 to 1.147. It is difficult to speak about the return of the upward trend in the US currency, but the USD/PLN exchange rate would have increased above 3.74. It is within the fluctuation range from recent days, and the base scenario for the Polish currency remains unchanged. However, the GBP/PLN quotations next week may not be stable. Events in Great Britain concerning Brexit may significantly increase the volatility - today the movements were in the range of about 4.73 - 4.79, but next week they may even exceed the range of 4.70 - 4.80 on both sides.

Next week's preview

On Monday, the National Bank of Poland (NBP) will publish data on the core consumer inflation index (CPI) in Poland in December. The median of market expectations indicates that the core index will amount to 0.7% per year, like in the previous month. Inflation in Poland remains subdued - core inflation has not exceeded 1.0% since the end of 2017. This fact reassures the Monetary Policy Council to maintain a dovish approach to monetary policy. Monday's reading should confirm the lack of pressure on prices and be neutral for the zloty.

On Tuesday, the market will probably be witnessing the most important event of the week. The British Parliament will vote on the government's Brexit plan. It is almost certain that Prime Minister Theresa May will lose this vote. It is hard to predict what will happen, although the chances of a "hard", chaotic Brexit are limited. New elections are more likely to take place. Uncertainty about what will actually happen, however, contributes to significant fluctuations in the pound's value, which will increase even further around the vote and once the results are announced (it will also be important how many votes in favour of the Brexit plan will be rejected).