Stronger dollar weakens the zloty's basket (Afternoon analysis 18.12.2019)

Given no major macroeconomic publications, the EUR/USD exchange rate fell to its lowest level since Friday, moving close to the 1.11. The pound remains under pressure, the GBP/USD exchange rate is the lowest since the elections. Globally stronger USD puts pressure on the zloty's basket. The EUR/PLN pair is above 4.27.

Not much time for the trade agreement

The higher than the expected index of the ifo institute, which measures the German business climate, proved to be an insufficient stimulus for the euro. The European currency came under slight supply pressure this afternoon. The EUR/USD exchange rate fell to around 1.1110, the lowest level since last Friday, although the dollar's appreciation against the euro was moderate and amounted to around 0.3% just before the start of the session on the New York Stock Exchange.

The somewhat stronger dollar today, combined with continued sales pressure on the pound, led to a fall in the GBP/USD pair's exchange rate to around 1.3060, the lowest level since election day in the UK on December 12th. The minimum level of today's quotations for this currency pair meant that the exchange rate went down by about 3.3% from its highs after the announcement of the election results. Market participants continue to discount the potential risk of a lack of a new trade agreement with the EU. The current one is valid until the end of next year, and less than a year from the date of the Brexit, i.e. January 31st, may be too short a period to achieve it, considering that the development of the Brexit took three years.

The dollar appreciation, which accelerated in the second part of the day, also weakened the zloty's basket slightly. The EUR/PLN quotations increased in the afternoon above 4.27, while in the morning we observed about 4.256. Nearly 0.5% gained the USD/PLN exchange rate, increasing to about 3.84, similarly the CHF/PLN pair, which rose to about 3.917, the highest level since Friday. The probability of a strong appreciation of the dollar seems limited, although the continuation of current levels with a worsening of sentiment on the US stock exchanges could weaken the zloty even further. However, the EUR/PLN exchange rate levels below 4.30 mean that the zloty is still in a relatively good condition.

Tomorrow's preview

At 10:00 a.m., the Polish Central Statistical Office (GUS) will publish data on producer inflation (PPI) and industrial production. The median of market expectations indicates a growth of production in November by 0.3% year-on-year, and PPI by 0.2%. Slightly higher growth, especially in the case of industry, could sustain the zloty in a relatively good condition.

At 10:30 a.m., the Office of National Statistics (ONS) will present data on UK retail sales in November. Market consensus suggests a 2.1% annual increase in sales (2.0% excluding vehicles and fuels). The publication of these data may slightly increase the pound's volatility, although the events at 1:00 p.m. will be more important for the British currency. Then, after the two-day meeting, we will find out about the Bank of England's statement. Changes in monetary policy are not expected, but the election victory of the Conservative Party and the negotiation period of the trade agreement may play an important role.

The US Department of Labor will publish a weekly report regarding the initial jobless claims at 2:30 p.m. A week ago, it turned out that they rose to 252,000, which was one of the highest readings in the last two years. The market consensus points to a reading of 225,000. Still, a further increase of around 250,000 may slightly damage the view of an active US labour market and adversely affect the dollar's quotations, although there will be no fundamental changes through one reading of the level of claims.