US inflation below expectations (Afternoon analysis 12.03.2019)

12.03.2019 16:29|Bartosz Grejner

Brexit still evokes emotions which are reflected in significant pound volatility. The GBP/PLN quotations have been at their highest level for nearly two years, and shortly afterwards they fell by about 2%. The probability of monetary tightening in the USA has slightly decreased - inflation in February was below expectations.

Lower pressure on the dollar's appreciation

Today, the Office for National Statistics (ONS) published data from the British economy. Excluding the international trade deficit, which turned out to be slightly higher (0.9 billion GBP) than expected, data from the British economy were positive despite all the turmoil associated with the Brexit. Production in the construction and industrial sectors and GDP growth pace in January - all readings clearly exceeded market expectations. The UK economy grew at a rate of 0.5 per cent per month, 0.3 percentage points above the economists' estimates.

These are positive data for the pound, although they came when they could not be a big support. Yesterday's visit to Strasbourg by Prime Minister Theresa May, though it initially contributed to a significant increase in the pound's exchange rate, in practice turned out to be nothing more than an old agreement with the EU wrapped in a new paper. Relatively quickly (even before midday) it became clear that it would not receive much support. The failure of this evening's vote is virtually certain. However, if May loses with a small number of votes - less than approx. 50 - this may be an argument for "perfecting" the agreement before the approaching Brexit deadline (March 29th). This, in turn, could send a signal that the British Parliament is close to accepting the agreement and that the EU would potentially have more scope to relax its position.

This is unlikely to happen, and the "new" plan will be rejected with a significant number of votes in the House of Commons. This, in turn, opens the way for the Brexit process to lengthen, but this will not reduce the uncertainty. New elections, a second referendum, a soft Brexit and a relationship with the EU similar to that of Norway and, in the least likely scenario, a hard Brexit will continue to be the possibilities.

The Prime Minister May's visit of the last chance in Strasbourg and the information that initially came from it helped the pound. In relation to the zloty, the pound reached a price of nearly 5.08 PLN, the highest since April 2017. When it turned out that the agreement reached in Strasbourg does not change much in the context of voting, the value dropped to about 4.97 PLN. After the beginning of the New York trading session, the pound returned above the limit of 5.00 PLN. Taking into account today's vote and also the ones in the next two days, the quotations of the British currency will be subject to considerable fluctuations. At the same time, the level of 5.00 seems to be the level of stability in the coming days, around which the GBP/PLN exchange rate will move.

Today, the Bureau of Economic Analysis (BEA) published important data on consumer inflation (CPI) for the US economy in February. This may not be the inflation preferred by the Federal Reserve (Fed) in its projections (PCE inflation), but its weaker than expected readings suggest a continued lack of inflationary pressures in the economy, which will probably encourage the Fed to show patience in monetary policy terms. Both the headline inflation index and its core reading (excluding energy and food prices) were 0.1 percentage points below economists' estimates and amounted to 1.5 and 2.1 per cent per year, respectively.

Somewhat lower probability of rate hikes in the USA resulted in the weakening of the dollar. It was not large, but the EUR/USD quotations approached the 1.1300 limit. The last time this level was observed last Thursday, even before the European Central Bank signalled no interest rate increases this year.

No pressure to increase the dollar, combined with the good sentiment on the equity market, contribute to the zloty's stabilisation. The EUR/PLN exchange rate is still moving around 4.30. Subsequent days and hours are unlikely to bring any significant changes in the zloty basket, and fluctuations should be limited to the GBP/PLN pair.

Tomorrow's preview

Brexit is likely to remain the key event this evening and tomorrow. The pound volatility can be expected when the British Parliament votes to leave the ranks of the EU without agreement, the so-called hard Brexit. There are very few supporters of this solution, so the hesitation associated with this event should not be great.

After weaker than expected inflation data in the US, market attention will focus on data on orders for durable goods. If these data prove to be "soft", as well as those on inflation, the dollar may once again depreciate. There would be no deep depreciation, as the US economy is in good shape, which looks even better compared to the eurozone. It seems, that the key data were those on inflation today, which currently stop the US currency appreciation.

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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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