Pound temporarily under pressure (Afternoon analysis 5.03.2019)

The British currency depreciated, but in the long run, it may appreciate strongly. The euro stabilises before the ECB on Thursday.

Pound again below 5 PLN

Quotations on the currency exchange market are stabilising before Thursday's ECB meeting and Friday's labour market data in the USA. The final PMI data for the eurozone turned out to be slightly better than the preliminary readings, and retail sales did not disappoint and noted an increase of 2.2% year-on-year in January - although December data were revised downward to an increase of only 0.3%. As a result, we observed a relatively narrow fluctuation range of 1.1320-1.1350 on the EUR/USD (before the New York trading began).

Larger fluctuations occurred in the pound. Better than expected reading of the UK services sector's PMI, which increased by 2.4 points above consensus to 51.3 points, helped little. The value of one pound fell below 1.31 USD today, the lowest level since February 26th. The pound expressed in the zloty cost about PLN 4.97, although on the last day of February its price on the interbank market was close to 5.06 PLN.

Today's decline was largely driven by the words of John McDonnell, a member of the Labour Party, who said that few labourists would support Prime Minister Theresa May's Brexit plan. This, of course, increases uncertainty around the whole process of leaving the European Union, but, on the other hand, it practically extends the whole process. As long as it continues, the volatility of the pound will be significant, and its quotations will be more resembling the behaviour of the currencies of emerging countries. However, the baseline scenario is that the pound will continue to increase significantly until the end of the year, from 5 to 10 per cent, given the very low risk of a hard Brexit, i.e. a chaotic exit from the EU without an agreement.

Apart from the GBP/PLN quotations, the zloty basket remained stable today. However, it is highly probable that the volatility will increase on Thursday and Friday. The final impact on the Polish currency will be seen on Friday afternoon. However, given the improvement in investors' sentiment to the zloty in recent days, potential changes should not be profound.

Tomorrow's preview

Wednesday may be not an important day in the currency market. The number of significant macroeconomic events is limited, and investors are waiting for the ECB's Thursday statement and press conference and the US labour market report on Friday.

Tomorrow at 2:30 p.m. ADP will publish data on changes in employment in the non-farm sector in the USA in February. Although they are not perfectly correlated with the official data of the Department of Labor, they may well correlate with the content of Friday's report. The median of market expectations indicates an increase in the payrolls by 188,000. The reading between 150,000 and 250,000 is unlikely to arouse much movement on the market. Only data going beyond this limit would have a chance to influence the dollar somewhat. However, the scale of potential changes is limited, due to the much more important events in the next two days.

Tomorrow the statement of the Monetary Policy Council (MPC) after the two-day meeting will also be announced. A press conference with the participation of Adam Glapinski, the MPC chairman, will start at 4:00 p.m. The conference will be held tomorrow. Not much has changed recently in the context of important macroeconomic data from Poland and no significant changes in the MPC statement, which will remain dovish, can be expected. The main reference rate is likely to remain unchanged at 1.5% until the end of the year. In this context, much depends on the attitude of the ECB - if in the following months the eurozone economy will show signs of a significant slowdown in growth and inflation will accelerate, then we can expect first signs from the MPC suggesting a monetary tightening in Poland, due to the relatively better current condition of the Polish economy from the eurozone economy.