Weak data from Great Britain and Japan (Daily analysis 10.12.2018)

The surprisingly weak data from Japan. British industrial production contracted in October. Uncertainty about Brexit is a burden on the pound. The zloty weakens slightly, but the euro remains below the 4.30 zloty limit.

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.

Data is not good

After a strong depreciation on the US markets on Friday, the reports received during the last hours suggest further challenges for investors and a weakening economic situation than we could have been expected. The Japanese economy contracted by 2.5% in Q3 in annualised terms. This is the worst result in 4 years. In year-on-year terms, the Japanese economy shrank by 0.3% in nominal terms, the weakest result for over 5 years. The fact that key categories, i.e. private consumption and corporate investment, failed again may be worrying.

The situation in Great Britain is no better. Industrial production in the UK declined by 0.8% on an annual basis. The overall reading was particularly negatively affected by data on the production of transport equipment and pharmaceuticals. Moreover, the foreign trade on the Isles is also worrying. Despite the relatively low exchange rate of the pound, the trade deficit rose to nearly 12 billion GBP in October. Even with the positive impact of trade in services, September deficit of 2.3 billion GBP rose to 3.3 billion GBP.

It is also worth remembering that a vote on Brexit should take place tomorrow. There is a chance, however, that it will be postponed. It is difficult to say which scenario for the pound is better. If the conditions for leaving the EU can be improved and the plan is put into effect, then this should strengthen the pound. On the other hand, if the renegotiations fail (EU opposition, lack of support within the British Government), then this is negative news for the sterling, as it reduces the time to reach an agreement. Then the risk of a disordered Brexit increases.

Coming back to the global economic situation, it is worth noting the decreased expectations regarding future interest rates in the USA. The market is currently evaluating increases at 37 basis points by the end of next year. At the beginning of November, it was over 60 basis points. Therefore, at this point, it is difficult to expect that after the December increase (by 25 basis points) the Fed will suggest three more increases next year and two more in 2020. As a result, these expectations will be lowered, but it cannot be ruled out that they will be reduced in a more limited way than the market is attempting. Consequently, next week's FOMC meeting does not have to be negative for the dollar, even if the monetary tightening path was flatter than the one suggested in September.

However, before we get signals from the Fed, the ECB will meet next Thursday. Given the weak economic results in the eurozone and subdued core inflation, it cannot be ruled out that this time the statement will be relatively dovish suggesting an extension of the period with unchanged interest rates. As a result, despite the slightly better condition of the euro in the past few days, it is difficult to expect the European currency to start appreciating strongly.

Slight weakening of the zloty

The weak external situation puts pressure on the zloty, but the zloty's depreciation is not significant. The EUR/PLN moved from 4.28-4.29 to 4.29-4.30. The franc, on the other hand, started to test the 3.80 PLN limit. The dollar and the pound are depreciating somewhat to PLN.

Apart from global issues, which may weaken the zloty, they should be rather neutral for the zloty. The macroeconomic calendar in Poland is practically empty in the following days, and the final data on inflation or balance of payments should rather not put more pressure on the zloty. In general, the EUR/PLN exchange rate may slightly exceed the 4.30 limit, but there is a relatively limited risk that deeper depreciation of the Polish currency will occur.