Waiting for the vote on Brexit plan (Afternoon analysis 15.01.2019)

The euro is slightly weaker, and the dollar is somewhat stronger during Tuesday's session where the most significant event of the day is scheduled for later in the day. Producer inflation in the USA fell by 0.1% in December, which prevented the dollar from further appreciation.

PPI fails expectations

While the market awaits the results of the evening vote in the British Parliament, the euro is under supply pressure. The EUR/USD quotations fell during the day to around 1.1410, the lowest level in 8 days. Germany's GDP data (1.5% GDP growth in 2018 as a whole) was negative for the euro and is fitting well into the recent negative sentiment for the euro after dreadful data from the industrial sector.

Data from the US turned out to be slightly worse than expected, which shifted attention to the dollar and weakened it slightly. The Bureau of Labour Statistics (BLS) reported that producer inflation (PPI), excluding energy and food prices, fell by 0.1% month-on-month in December, while it was expected to increase by 0.3%. On a yearly basis, the index was 2.7%, similar to November, although by 0.2 percentage points below expectations.

After all, PPI data will have a limited impact on the dollar. The number one topic that could affect the US currency today is, of course, what is happening in the UK. The vote on the Brexit plan is scheduled at around 8:00 p.m. London time, i.e. around 9:00 p.m. Polish time. We should expect very large fluctuations in pound quotations, and the possible scenarios have already been described in our previous analysis. Increased volatility in pound's quotations may also affect the valuation of, among others, the euro and the zloty.

A failure by a small number of votes (less than 60) may improve overall sentiment in the market, although in such a case the pound could significantly appreciate in relation to the euro and the zloty. The opposite (defeat by more than 150 votes, closer to 200 votes) could severely weaken the British currency.

Before the vote takes place, several speeches will be made by representatives of central banks in the eurozone and the USA (Mario Draghi from the ECB and Neel Kashkari, Esther George, Robert Kaplan from the Federal Reserve). They may introduce some volatility to the euro and dollar quotations, although the positions of both central banks now seem quite clear and data-depend that will flow from the economies of the eurozone and the USA. The market is probably preparing itself for the results of voting in the United Kingdom, therefore the speeches should not have a significant impact on currencies.

The zloty's situation is also unlikely to change significantly until the voting time. The zloty remained relatively stable today, only slightly deviating from Monday's closing levels. This may change in the evening and the culmination will come when the results are reported. Extreme fluctuations can be expected on the GBP/PLN pair (even beyond the range of 4.70-4.90), although a very small or very large defeat may also affect the whole zloty basket.

Tomorrow's preview

At 10:30 a.m., the Office for National Statistics (ONS) will provide data on consumer inflation in the UK in December. The median of market expectations indicates an increase in the average price level (excluding energy and food) by 1.8% year-on-year, similar to the previous month. This data is important from an economic and monetary policy point of view. However, it is hard to expect that this publication will have a significant impact on the pound, given the vote on the Brexit plan in parliament the day before and its implications. If the data does not deviate more than 0.1 percentage points from the market consensus, it should be neutral for the pound.

At 2:00 p.m., the National Bank of Poland (NBP) will present data on core inflation in Poland in December. Market expectations suggest a reading of 0.6% year-on-year, which would be the lowest level since July 2018. For over 4.5 years, the core inflation index has not crossed the 1% level, which currently supports the dovish message from the Monetary Policy Council. As long as core inflation does not increase and does not exceed the 1% (recently the opposite trend has been observed), the chances for the zloty's appreciation are limited.

Half an hour later, the Census Bureau will publish US retail data in December. The market consensus for sales excluding vehicles shows an increase of 0.1% month-on-month compared to 0.2% in November. The euro is under clear pressure (due to weak macro data), which strengthens the dollar. The EUR/USD reversed the loss resulting from the relatively dovish statement from the FOMC minutes. Although concerns about the economic slowdown remain unchanged, so far they do not affect the USA as much as they affect Europe or China. Slightly higher than expected increase in retail sales could confirm this slightly different situation, indicating continued strong consumption and strengthening the dollar.