Great Britain and France in the limelight (Daily analysis 11.12.2018)

11.12.2018 13:33|Marcin Lipka

The pound rebound after yesterday's strong declines was observed today. France's problems may start to harm the eurozone. The zloty continues to weaken slowly in relation to the euro. The franc, with a score of around 3.82, is approaching monthly highs.

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.

Brexit still front-page news

The cancellation of Brexit agreement vote in the British House of Commons and messages from EU representatives about their unwillingness to renegotiate the agreement resulted in a strong pound depreciation, at some point in time exceeding 1.5%. Today, the British currency pared some of the losses (a decrease compared to yesterday's opening is about 1%), but the issue is still far from being resolved.

Prime Minister Theresa May has clearly chosen a strategy of "talking through" the problems and trying to change the parameters of the emergency mechanism for Ireland (backstop), which will reduce the risk of imposing EU law on the United Kingdom in the absence of a new trade agreement with Brussels. Although EU leaders clearly suggest that there is no way back to negotiations and that the agreement is the best possible outcome, there may be little room for change.

Today, Jean-Claude Juncker, President of the European Commission, said in the Strasbourg Parliament that "there is no room whatsoever for renegotiation but of course there is room if used intelligently, to give further clarification and interpretations without opening the withdrawal agreement" with the Union. Prime Minister May has already met Dutch Prime Minister Mark Rutte today and is also planning to meet German Chancellor Angela Merkel.

Today, fundamental changes in the agreed agreement are unlikely. However, investors are not particularly afraid, as there is a conviction that the parliamentary majority wants a relatively mild agreement or even another referendum. Few people are in favour of a hard Brexit, and practically no one wants to leave the Union in a chaotic manner. The latter scenario is the least likely, but if there is no political agreement by the end of March, it may lead to this.

It seems unlikely that the contentious issues will be resolved before the end of the year. Therefore, the pound may remain under pressure, but the belief that there is no desire for a disordered Brexit should, for the time being, halt deeper falls. It is also difficult to determine whether early elections are beneficial for the pound. Not all members of the Labour Party want another referendum, and Jeremy Corbyn, chairman of the opposition Labour Party, also takes a relatively sceptical stance on this issue.

So far, however, the market does not seem to look so far into the future. According to media reports, the vote (on the agreement) may take place in a month's time. Until then, the market will follow the talks and try to find out whether the hypothetical changes will satisfy Parliament. The next fluctuation of the pound may occur, if the Tories want to stay in power without voting on the agreement.

France and its problems

Although the market's attention focuses mainly on the UK, problems also arise in France. The French President accepted a large part of the "yellow vests" demands and agreed to relax the fiscal rules. Bloomberg quoted the economic estimates of the costs in 2019 from the daily "Les Echos". The deficit will rise to 3.5% in France and the public finance sector will increase to 11 billion EUR.

It seems that not only Italy will have problems with the European Commission and the excessive deficit procedure, but also the second economy in the eurozone, France, will join this group. In addition, support for Macron is declining rapidly. Currently, it is about 20-25%, and in the first half of the year, it fluctuated between 40-50%. Shortly after last year's elections, it sometimes exceeded 60%. This is not good news for the euro, especially considering the weakening economic growth pace in the eurozone.

Zloty starts feeling pressure

The Polish currency is beginning to feel external pressure. In the early afternoon, the EUR/PLN exchange rate fluctuated within the range of 4.30. The broader market also shows signs of an increase in risk aversion. The franc, which in relation to the euro is at its three-month highs, became stronger. Investors are becoming concerned about the negative effects of the disordered Brexit, the weaker economic situation in the eurozone and potential conflicts between the budget deficits of Italy and France and the European Commission. The franc in relation to the zloty is about 0.05 PLN from the highest levels since June 2017.

Moreover, the risk of further zloty weakening is growing if the external situation continues to deteriorate. The EUR/PLN may exceed the 4.30 limit, and the dollar may move to the 3.80 boundary. It is possible that the franc will start testing multi-month highs (3.86-3.87 PLN).


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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 Cinkciarz.pl Sp. z o.o is prohibited.

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