Waiting for new signals (Daily analysis 28.01.2019)

Investors await reports on Brexit, foreign trade issues and the outcome of the January's meeting of the Federal Reserve. The zloty remains stable and in relation to the euro stays below the 4.30 boundary.

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

• A lack of macro data may noticeably impact the analyzed currency pairs.

US bands without reaction

January's optimism observed on the US markets caused the US indexes to pare losses from the end of last year. Reports on the opening of federal institutions (end of the shutdown at least until mid-February) and the visit of a Chinese delegation to Washington related to foreign trade (starting tomorrow) should maintain positive moods. In this scenario, the dollar's behaviour may be somewhat surprising, as it depreciates despite very weak data from the European economy and the dovish ECB's stance.

The quotation of the US Treasury bonds and estimates of the Fed's movements are the reaction to this. Better sentiment on the equity market and the possibility of stabilisation of trade relations between the USA and China practically do not cause any increase in the yield on Treasury bonds, regardless of whether we look at two-year or ten-year Treasury instruments.

Yields on 10-year Treasury bonds are only at the level of 2.76%, i.e. at the same level as last December 27th. Then, the basic stock exchange index in the USA (S&P 500) was 6% below current levels. The market also still does not value any increase in interest rates until the end of the year, which is the same as a month ago.

As a result, the interest rate or bond market does not believe that an improvement in equities and better economic information (e.g. concerning trade) will change the Federal Reserve's stance on stopping the tightening of interest rate rises. Thus, the dollar does not get a sufficient impulse for growth, and the weakness of the euro alone (still quite limited) is not able to trigger a downward trend on the main currency pair. On the other hand, some emerging market currencies benefit from a better sentiment. For example, the Chinese yuan has strengthened to the dollar by 2% since the beginning of the year, and to the euro by almost 2.5%.

In addition, it seems unlikely that the Fed's suggestion to stop the monetary tightening will be followed by some major change during the January meeting (the statement with the conference will take place on Wednesday). The Federal Reserve members are reluctant, and we must have at least a few months of relative calm, good macro data and sustained inflationary pressure for monetary authorities to start thinking about returning to the increases. Hence, the outlook for the dollar remains relatively weak, even though the euro is likely to be in an even worse situation.

Brexit in the limelight. Stable zloty

The weak dollar and the euro's problems do not interfere with the relatively good sentiment on the pound. Tomorrow, a battle is planned in the House of Commons over the amendments on Brexit. So far, several of them have been submitted, and it is possible that their number will increase. They imply a whole range of Brexit related options (from the postponement of the deadline for leaving the EU to modification of the Brexit and indicative votes on, for example, another referendum).

The most likely scenario is an initiative to avoid a chaotic Brexit, which forces Prime Minister Theresa May to negotiate a more lenient agreement or gives the opportunity to take over the negotiations with Brussels into the Parliament. It seems that this idea will be implemented in the coming weeks, especially as it is supported by the majority of labourists and some of the Tory. Recent increases in the pound have, however, been large and it is possible that most of the positive information is already included in prices. The next wave of increases can only happen in the following weeks if it turns out that an orderly Brexit is certain and that future relations between Brussels and London are likely to be relatively close.

Still not much is happening on the zloty. The Polish currency remains exceptionally stable in relation to the euro and, in the base scenario, its quotations remain slightly below the 4.30 PLN on the EUR/PLN pair. Since the bar is also set relatively high in the context of deeper movements on the main currency pair, also the zloty/dollar relation should not differ significantly from what we observe today around midday.