Great Britain's worsening economic situation (Daily analysis 11.02.2019)

11.02.2019 13:01|Marcin Lipka

The market awaits information on Brexit, the US and Chinese trade talks, and the government shutdown in the US. Weak data from Great Britain - the data failed in case of the GDP readings for the Q4 concerning industrial production and trade balance. The zloty under the pressure of events in Europe. The euro approaches 4.32 boundary, and the dollar and franc exceed the 3.80 PLN level.

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.

Great Britain problems before Brexit

The global trends observed last week continue. The euro is under pressure from the weak eurozone economic situation and probably the lack of interest rate increases by the ECB in the following quarters. The EUR/USD is also depreciated by the relatively good economic situation in the US and trade problems between the US and China, which, as data from recent months has already shown, is far more harmful to the Old Continent than to the US.

Politics is also becoming a burden to the euro. Disputes between Italy and France or elections to the European Parliament at the end of May could strengthen Eurosceptic and populist forces in the Union, which could systematically depreciate the euro. This is confirmed by the EUR/USD relation, but also by the EUR/CHF one, where we approach the 1.13 boundary.

In the first part of the European session, most attention was paid to data from the United Kingdom. The data can be summarised in the following terms: disastrous. First of all, there was a very serious slowdown of GDP in the Q4 in the UK, from a growth of 0.6% (in the Q3) to 0.2% (with expectations at 0.3%). The quarterly GDP does not fully reflect what happened in December alone.

The last month of last year was the fifth consecutive decrease in industrial production (this time by 0.5% month-on-month). The majority of production components declined, including, e.g. a drop in the pharmaceutical industry by 4.2%.

The GDP in December (for some time, the ONS has also published monthly estimates) was at minus 0.4%. This was the second weakest result since the end of 2012.

However, the worst result was reported for foreign trade data. In the fourth quarter, the UK had a trade deficit (covering both goods and services) exceeding 10 billion GBP. Overall, the trade balance was minus 32 billion GBP in 2018 as a whole, almost 9 billion more than in the previous year (the second largest deficit in the last 8 years). At the same time, it is worth noting that all this happens with a relatively weak pound (both in relation to the euro and to the dollar). Therefore, the British economy remains uncompetitive even though the pound exchange rate supports exports.

The pound reacted in a limited way to data from the British economy because investors believe in a positive solution to the Brexit issue (as was the case with the Bank of England's decision on Thursday). Although this positive solution may happen (the baseline scenario is leaving the EU with an agreement or an extension of the negotiation period), no breakthrough is likely to occur by the end of February. If there is a month to the cut-off date (March 29th), the market may be less optimistic, which means that the pound's price may depreciate suddenly, even if the sterling is, in fact, the final winner of an orderly exit from the EU.

Zloty under pressure

The Polish currency is slowly but steadily depreciating. Today, the EUR/PLN exchange rate reached the 4.32 boundary, which is the highest level since November last year. There dollar and franc also appreciated in relation to the zloty, which in both cases exceeded the 3.80 PLN level.

Currently, most of zloty's problems result from regional factors. First of all, the economic slowdown in the European Union, uncertainty related to the Brexit and elections to the European Parliament. Fewer problems affect Asian or Latin American currencies. It is clear that global investors are afraid of the consequences of a deep deterioration of the situation in Europe more than in other regions of the world. The attitude towards the zloty may remain negative so that further depreciation of the zloty seems to be the baseline scenario.


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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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