Brexit - front page news (Daily analysis 21.09.2018)

21.09.2018 12:40|Marcin Lipka

The increasing risk of disordered Brexit with limited impact on the pound. Weak PMI readings from the eurozone were received again. The zloty remains stable in relation to the euro after foreign readings and GUS data on retail sales.

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.

Failure in Salzburg

Recent events in Salzburg have attracted a lot of attention, also in the broader market. The Financial Times reports that Prime Minister Theresa May had fallen into a trap. The main points of conflict in the negotiations between the UK and the EU are the issues of the common market and the border between the Republic of Ireland and Northern Ireland.

For a long time, Prime Minister May's proposal to keep the UK within the area of free trade of goods (the EU has a trade surplus in the UK) seemed to be a sufficient stimulus for Brussels to opt for the undermining of the single market (free movement of goods but services, capital and workers not anymore). In Salzburg, however, the EU leaders (Juncker, Tusk) clearly rejected this proposal.

The border issue between Northern Ireland and the Republic of Ireland is still unclear. The EU proposal, in short, assumes that the control of the flow of goods would apply not at the new EU border (Northern Ireland), but only on the main British island. This, in turn, is unacceptable to the United Kingdom, as it would disrupt the integrity of the United Kingdom. Of course, in the background, there is still the past story of the conflict on the Irish island.

The annual Conservative Party conference (at the end of September) is also an element of uncertainty. Supporters of the hard Brexit, and therefore opponents of Prime Minister May's, will have strong arguments to question her leadership (Theresa May's strategy for the moment has turned out to be a failure). This increases the risk of another election to the House of Commons, and thus also of negotiating chaos with Brussels. With so much negative information, it is surprising that the pound against the dollar is above yesterday's opening levels. The sterling's behaviour also shows how strong the global positive sentiment is, as the pound would normally lose about 1-2% to the main currencies, even taking into account the weakness of the dollar.

Weak data from eurozone

Before midday, IHS Markit published preliminary PMI readings for major European economies (Germany and France) and for the eurozone as a whole. Again, the data failed. The reading combining services and industry for the whole eurozone fell to 54.2 points, and 0.2 points were missing to reach the lowest level in two years.

The industry was particularly weak. The index for the whole currency area fell to 53.3 points (54.5 was expected). This is the lowest level in two years. In addition, for the last 9 months, only one had an increase in this index. However, the greatest concern is aroused by new orders in industry, which have evened the weakest result since 2015, and foreign orders have shrunk for the first time since June 2013. Service data looked much better (especially in Germany), but this does not improve the overall weak sentiment. Due to a strong appetite for risk and an attempt to make new openings by the markets (negation of negative information related to foreign trade a few days ago), the EUR/USD remained quite high (slightly below the 1.1800 limit). Due to the general optimism, for the time being, it is difficult to say what information could bring back a more balanced view of the global situation.

Zloty remains strong

The situation on the zloty remains very stable. Around midday, the euro exchange rate was at 4.29 level. The global risk appetite minimally helps the zloty, but these movements are marginal. Slightly weaker is the pound and the dollar, which is under pressure of a return of good moods in emerging markets.

Only a few impulses appeared in retail sales data that could influence the zloty. The data showed an increase (in constant prices) by 6.7% y/y, i.e. practically according to forecasts. The growth of less than 7% was also in line with the trend observed since the beginning of the year. In the coming hours, the zloty should remain stable in relation to the euro and will probably maintain increases against the pound and the dollar.


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