Nervous atmosphere around Brexit (Daily analysis 20.03.2019)

Reports on Brexit may at some point trigger serious downward pressure on the pound. The dollar weakened before the Federal Reserve meeting. Mix of data from the Polish economy - excellent consumer sentiment and industrial production results, but weak budget results after February. Contradictory reports about Polish Finance Minister Teresa Czerwinska. The zloty strengthens slightly before the FOMC meeting.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 7:00 p.m: Federal Reserve's decision on interest rates (estimates: no change, in the range of 2.25-2.50 per cent). Publication of a statement and new macroeconomic projections and estimates of future interest rates.
• 7:30 p.m.: Start of press conference after the Federal Reserve meeting.

There will be another EU summit

It seemed that a decision to extend negotiations on the Brexit would be taken at the EU summit scheduled for 21-22 March. However, this is unlikely to happen. Jean-Claude Juncker, President of the European Commission, said in an interview with Deutschlandfunk Radio quoted by the Financial Times that it would not be possible to decide to extend the negotiations at the planned summit and that it would be necessary to convene another one next week. It is worth noting, however, that at the end of next week, the deadline for the UK to leave the EU is also passing, namely March 29th.

British Prime Minister Theresa May is opting for a shorter negotiation period than expected. The extension is to be three months (until the end of June this year), which is a gesture towards the Eurosceptic part of the Tory, which threatened that its ministers would resign from office if the extension included the need to participate in elections to the European Parliament (reports, e.g. The Guardian).

Therefore, key events may postpone to next week, although the Union may be reluctant to extend the negotiations for a short period of time, as recent months have not brought any progress. In addition, there is much less time than the additional three months, as it has to be decided by mid-April whether the United Kingdom participates in the May EP elections.

A chaotic Brexit is still unlikely, but the political problems and risks to the British economy are increasing. Moreover, tensions within the Conservative Party may suddenly explode, whether from a moderate part of the Tories or the more steadfast members of the ruling party. This may happen unexpectedly, and the pound market is unlikely to perceive it positively. It is also worth remembering that the agreement itself should be changed (this requires consensus within the government and EU consent), as another vote on the same plan has been blocked by the Speaker of the House of Commons.

As a result, the risks to the sterling increase. It may be more sensitive to Brexit signals than in recent relatively calm days. Today's risk also seems to be directed towards sudden weakness rather than trying to push the pound to higher levels.

Important Fed

The Federal Reserve's evening meeting will be significant. Given the continuing global uncertainty (Brexit, trade with China, weak data from Europe), the external factor seems to suggest a mild message of the FOMC members to the market. This means not only a reduction in estimates of future interest rate increases but also changes in the statement. First estimates of the GDPNow model of the Federal Reserve from the Atlantic suggest an increase of 0.4% in the Q1 2019 on an annualised basis, i.e. 0.1% quarter-on-quarter. This may also be another argument supporting a downward revision of GDP estimates, even taking into account that in recent years the weaker first quarter did not mean a weaker entire year.

As a result, the dollar may remain weak after Jerome Powell's press conference, the Chairman of the Federal Reserve, and it is possible that the scale of the depreciation may even deepen, given the mild message from the FOMC.

Good data and government confusion

In the morning there were many reports from the Polish economy. Industrial production increased in February clearly above market estimates - 6.9% year-on-year, compared to expectations of 4.8% year-on-year. The second positive information was an increase in the household condition index measured by the Polish Central Statistical Office (GUS) to a record level - 8.2 points. This should suggest that the willingness to consume remains high and that retail sales results are still solid.

After two months, the budget balance sheet was worse than expected. A deficit of 0.8 billion PLN was recorded, while in the same period last year there was a surplus exceeding 4 billion PLN. VAT inflows grew surprisingly slowly compared to the previous year - by only 2.4%. According to PAP other taxes recorded solid increases - PIT by 12.8%, CIT by 7.9%.

Apart from economic reports, there is growing uncertainty about the fate of Finance Minister Teresa Czerwinska. The wPolityce.pl portal stated that the minister resigned at the end of February, but Prime Minister Mateusz Morawiecki did not accept this resignation. MF spokesman Pawel Jurek denied media reports on Twitter, claiming that prof. Czerwinska did not resign.

In the early afternoon, Bloomberg wrote that the Polish Finance Minister was "in an escalating conflict with the Prime Minister". According to three acquaintances, the conflict would concern the electoral fiscal plan. The agency also claims that Minister Teresa Czerwinska "is currently on sick leave". The information concerning the Minister of Finance does not influence the zloty, and in the early afternoon the Polish currency, mainly due to global factors, was even appreciating.

It also seems that the mild message from the Fed can further help the zloty. It will be difficult to observe clear drops below the 4.28 EUR/PLN limit, but the further weakening of the dollar on the global market may push the USD/PLN below the 3.75 limit.