Sudden dollar weakening (Afternoon analysis 14.02.2019)

Retail sales in the US in January recorded a strong decline, which weakened the dollar. Market sentiment deteriorated as concerns about the negative impact of the partial government shutdown returned.

USA supports the euro

No new macroeconomic data from the UK was published today, but the British currency was still weakened. The GBP/USD quotations fell below 1.28 and also below the 50-day moving average for the first time in a month. Although the euro is also under noticeable supply pressures, today it reached its highest value in relation to the pound for a week. Today's depreciation is the result of the expectation of the vote this evening in the British Parliament.

If Prime Minister Theresa May loses today's vote, this could undermine her negotiating position with Brussels and make it difficult to reach an agreement on the Irish backstop. Today, Parliament may also force the publication of an analysis of the impact of the Brexit on the economy, which would probably slightly worsen the sentiment towards the British currency.

In the afternoon the dollar experienced an unexpected depreciation. The Census Bureau presented data on US retail sales in January, which fell by 1.2% per month. The core index (excluding sales of vehicles) turned out to be even weaker, as it fell by 1.8%. In both cases, these are the most profound monthly declines that we have seen since 2009. Also, the data on initial jobless claims submitted last week was not impressive - it turned out to be by 14,000 higher than expected and amounted to 235,000.

The market reacted practically immediately. Europe's main market indexes and US futures lost all day-to-day profits, and US Treasury bond yields declined sharply, which also weakened the US currency. The dollar index (DXY) also returned all today's profit and before the beginning of the New York trading session, it fell below the level of yesterday's closing. The EUR/USD quotations moved back above 1.13.

It should be noted that these are still high levels of the dollar. However, concerns about the negative impact of the partial government shutdown on the US economy may reoccur. It could also affect the data on the GDP growth pace in Q4, which has not yet been published due to the aforementioned shutdown. This may give some support to the euro, as market concerns about the economic slowdown will now shift towards the US.

Very weak data on retail sales in the US is theoretically a good signal for the zloty - the sales pressure on the Polish currency could decrease. However, the impact of this information on the zloty's basket was small and was mainly limited to the USD/PLN pair, which fell to about 3.84. The GBP/PLN exchange rate moved in almost the same range as yesterday, i.e. about 4.92-4.95 and due to the vote in the British Parliament, significant fluctuations in the pound value may continue today. The fall in yields of the US Treasury bonds and the dollar had practically no impact on the pair's quotations. The base scenario remains the price increase around 4.35.

Tomorrow's preview

At 2:00 p.m., Benoit Coeure, Member of the Executive Board of the ECB, will address a speech in New York on the role of the European Central Bank, financial regulation and the role of the euro. Taking into account the recent significant fluctuations and falls in the euro and the mixed data coming from the eurozone, Coeure's speech may increase the volatility of the euro, especially if it concerns the economic outlook or monetary policy.

In the afternoon, data from the USA will be published. At 3:15 p.m. the Federal Reserve will present industrial production data for January, and at 4:30 p.m. the University of Michigan will present the consumer sentiment index. The median of market expectations indicates an increase in production by 0.1 month-on-month and the sentiment index to 93 points. If data from the USA exceed market expectations, it may give another argument in favour of weakening the large disproportion between the economies of the USA and the largest European countries. This can result in an increase in Treasury bond yields in the USA and an appreciation of the dollar, which may have a negative impact on both the euro and the zloty.