Stronger pound (Afternoon analysis 31.12.2018)

The British currency gains at the end of 2018, but further such growth may be difficult to sustain in the coming weeks. The zloty is stabilising - it is supported by a slightly weaker dollar and good moods on the stock market.

GBP/USD over 1.28

The last day of 2018 ends in a positive mood. The main European stock exchange indices were clearly gaining in value today, but only after an immensely weak last few months. The good sentiment today has also translated into the quotations of the British currency. The pound gained to virtually all currencies. The exchange rate in relation to the dollar exceeded the 1.28 mark this afternoon, and in relation to the zloty it rose above 4.81 for the first time in just over three weeks.

However, the enthusiasm of the market towards the pound seems to be somewhat exaggerated. The week starting on 14 January is to see a vote in the British Parliament on the brexit plan worked out by Prime Minister Theresa May (the exact date of the vote has not been given). It will be difficult to find sufficient support for the plan. After a potential fiasco of the May's plan, there is a great deal of uncertainty as to what will happen next. Therefore, we can still expect significant volatility in the pound over the next two weeks and probably its depreciation.

The good health of the pound today was also the result of a slightly weaker dollar. The end of the year was not the best for either the US stock exchange or the US currency, as a result of fears about economic growth, government shutdown or pressure from the US President on the Federal Reserve, among others. Persisting supply pressure on the dollar and the growth of the main European stock exchange indices supported the stabilisation of the zloty during the last session this year (with the exception of the GBP/PLN mentioned above). Although the whole year was not positive for the Polish currency - it lost 3 percent to the euro and 8 percent to the dollar, the situation on the market should support the current levels of the zloty in relation to major currencies until the end of the day.

Wednesday’s preview

On Tuesday, i.e. on the first day of the New Year, most of the world's stock exchanges are closed and there are practically no planned macroeconomic publications at all. Trading will therefore be very limited. Wednesday, in turn, will be a normal trading day and we can expect a return of liquidity. At 9 a.m. IHS Markit will publish the PMI of the Polish industrial sector for December. Last month, it fell below the 50 point mark, which separates growth from decline in the sector. The reading of 49.5 points was also the lowest in four years. The median of market expectations indicates its growth to 49.8 points. This index reflects current sentiment on the global market, which has deteriorated strongly, but it has not yet been translated into "hard" data from the Polish economy, which are still very good. However, reading over 50 points could slightly strengthen the zloty, although its condition nowadays depends to a greater extent on external factors.

Within the next hour we will also learn similar indicators for Spain and Italy. The final readings of this index for Germany, France and the euro area as a whole will also be published. They may have a relatively strong impact on euro, after the Christmas period and already in the New Year, if they deviate from consensus and preliminary data (51.4 points for the euro area). Especially as for both France and Italy this indicator has fallen below 50 points and further lower than expected readings may raise concerns about the health of the euro area economy.

IHS Markit/CIPS will also present the December PMI data for British industry at 10:30 a.m. In the previous month, the index surprised positively, rising to 53.1 pts., 1.5 pts. above expectations. In the context of the last year, however, it is still a relatively low reading - 12 months ago it was as high as 58.2 points. Although, the decline in activity was also the same for other European economies. The market consensus points to a slight decline in activity in the sector, resulting in a decrease in PMI to 52.6 points. Although deviations from the consensus may increase the range of fluctuations on the pound, the value of the British currency is to a greater extent influenced by factors related to the Brexit process or the condition of the dollar and the euro.