Uncertainty among Brits (Daily analysis 11.01.2019)

Once again, the Federal Reserve suggests a pause in monetary tightening policy. Weak data on industrial production in Italy. Inflation data from the US should not significantly affect the dollar. The zloty remains stable, the euro costs about 4.30 PLN.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:30 p.m.: CPI inflation for December from the USA (estimates: minus 0.1% month-on-month and 1.9% year-on-year; excluding fuel and food 0.2% month-on-month and 2.2% year-on-year).

Fed, trade and data from Italy

The next day has passed, and another six official speeches of the Federal Reserve members (not counting the presence in the media) have been held. However, the number of speeches did not translate into a variety of messages. The message is clear and united. For the moment, there are no more interest rate increases and the bar to change this view is quite high (we have written about it in the last few days).

Apart from events related to the Fed, it is also worth noting that after successful negotiations (as much as it could have been achieved under the current conditions), further talks have already been planned in Beijing. This time they will take place in Washington and will be at a relatively high level. According to Bloomberg, China will be represented by Deputy Prime Minister Liu He (Chief Economic Advisor to President Xi), who will meet the key members of the US administration - Robert Lighthizer and Steven Mnuchin. At present, however, the agreement helps Asian currencies (e.g. the Chinese yuan) or the euro more than the dollar. Therefore, the closer it is to actually reduce the consequences of a trade war, i.e. lowering customs duties, the more pressure may be exerted on the US currency.

Although positive reports from Asia support the euro and damage the dollar, reports from the eurozone economy remain weak. Industrial production in Italy fell by as much as 2.6% y/y in November (adjusted for the number of working days). This is the worst result in 4 years. It is also another weak production result after both Germany and France. According to the data presented by Istat, it can be seen that production falls are wide (covering many product categories). It will be interesting to see how the data will develop in December. It seems that the readings should improve. Despite many problems in the eurozone (external and internal), such strong declines are not justified. However, the worse than expected macroeconomic situation in the single currency area and the associated risk of the ECB delaying interest rate increases should keep the euro at relatively low levels against the leading currencies (dollar, franc or yen).

The key moment for Great Britain

On January 15th, a vote on Theresa May's plan to leave the EU is planned. It has not been modified in any way compared to the December proposal, so the chances of its adoption are close to zero due to the significant divisions within the ruling Conservative party and the negative opinion of its Northern Ireland co-coalition (DUP).

However, what will happen if the plan is rejected? This is extremely difficult to determine. According to Parliament's opinion, the new plan has to be voted on in the next 3 working days by the House of Commons. This plan does not exist, or at least it is not open to the public. Brussels also does not suggest that it is ready to make concessions.

The pound is under pressure, although the risk of a hard Brexit is not particularly high, as Parliament will not agree to such a solution. In the afternoon, Evening Standards reported that the period of staying in the EU would be extended after March 29th. This helped the sterling but was quickly denied by a spokeswoman for the British Government. For the time being, it is difficult to point to a realistic scenario that could arise in the next few days and has led to a strong appreciation of the pound. In the longer term, the growing chance of a mild Brexit or another referendum is likely to allow the pound to strengthen to most currencies (including the zloty).

Still, no major changes observed on the zloty

There are still very limited changes in the Polish currency. The EUR/PLN exchange rate is close to the 4.30 boundary, and there is little indication that the situation of the zloty in relation to the euro will change more. The stabilisation of the zloty is also visible in relation to the forint and the Czech koruna (in the latter case at relatively low levels).

Significant changes in the zloty should not also be expected after the inflation readings from the USA. Even if it was higher than estimated (above 2.2% y/y), it is difficult to expect that one reading could clearly change the fate of the dollar with such a consistent message from the Federal Reserve. As a result, the stabilisation of the zloty remains the baseline scenario.