Stronger pound and belief in Germany (Daily analysis 21.01.2020)

The British labour market at the end of 2019 surprises with positive data, which strengthen the pound. Economists' expectations regarding the German economy rose in January to the highest level in over four years. Limited changes on the zloty: the EUR/PLN pair still around 4.24.

Expectations towards interest rates cut decrease

The solid end of the year in the British labour market. According to the data published by the Office of National Statistics (ONS), the average weekly wage rose by 3.2% year-on-year in the September-November period, 0.1 points above expectations. In addition, November brought a strong increase in employment, with a rise of 208k in the September-November period, making it the strongest increase in a year. The number of claimant count, which rose by 14.9k in December, was also a positive surprise.

Following the better data from the British labour market, the probability of interest rate cuts at the January meeting of the Bank of England fell by several percentage points (to about 63%). The pound's quotations were also supported - in the morning the GBP/USD exchange rate was still below 1.30, while in the afternoon it was just at 1.3060, gaining about 0.35% compared to Monday's closing level. However, if we look at the fluctuations from previous days or even weeks, today's changes are very limited.

Later in the week, retail sales data and PMI indexes from the UK economy will be available and will help to assess the chances of monetary easing in the Islands at the end of the month. However, today's data have somewhat reduced these chances, which may support the pound later in the day. The GBP/PLN exchange rate has again come close to 5.00 and may exceed it if we observe the further strengthening of the British currency in the global market. However, the zloty's basket, just like the euro, was supported by surprising data from the ZEW Institute.

The monthly index published by ZEW Institute on economists' sentiment significantly exceeded market expectations for the German economy (by 11.7 percentage points), rising to its highest level since July 2015, i.e. to 26.7 points. The current assessment of the economic situation also turned out to be above consensus: -9.5 pts. compared to expected -13.5 pts. The strong start of 2020 for Europe's largest economy fits well with the expectations of a recovery in the industry in particular. On Friday, the preliminary PMI indexes will be announced, which may confirm the positive sentiment seen in the ZEW index and additionally support the common currency.

After the publication from ZEW, the euro was somewhat stronger today. The EUR/USD quotations increased again above 1.11. No appreciation of the dollar is also good information for the zloty. The Polish currency quotations were within a limited fluctuation range - the EUR/PLN pair is still quoted around 4.24, the USD/PLN around 3.82 and the CHF/PLN around 3.947-3.958. The calendar of macroeconomic publications in the further part of the day is practically empty (the summit in Davos continues, but it has no significant impact on the market) and the PLN basket should be relatively stable.