A good day for the pound (Afternoon analysis 19.03.2018)

The UK and the European Union discuss the conditions of the transitional period connected with Brexit. The euro appreciated slightly after hawkish reports from members of the European Central Bank.

The pound rises

The Wall Street Journal released unexpected news today. It published information that the EU had reached an agreement about the conditions of the transitional period for the UK after leaving the European Union in March 2019 (based on info from the EU). In addition, the UK would have to continue to implement all EU rules under the jurisdiction of the EU Supreme Court until the end of 2020, and would not have a say in future EU decisions. The Wall Street Journal information was later confirmed at a press conference in Brussels with the participation of negotiators from both sides.

The chance for limiting the uncertainty about the Brexit process is positive for the pound. The British currency's value expressed in the dollar (GBP/USD) exceeded 1.40 USD, reaching its highest level since the end of February. In turn, in relation to the zloty, the pound was the strongest since mid-December last year and exceeded 4.82 PLN.

In turn, Reuters published information on the European Central Bank (ECB). According to the data, the Council members, who make monetary policy decisions, have not seen any reason to extend the asset purchase program beyond the end of 2018. They also feel "comfortable" with the market valuation of rate hikes already in the first quarter of next year. This information caused euro appreciation, but it was relatively limited. The prices of the main currency pair increased from 1.228 to 1.23, which, was only 0,2% above Friday's level.

The Polish currency (excluding its relation to the pound) has remained relatively stable today, oscillating around Friday’s levels. One euro cost about 4.22 PLN and the dollar less than 4.23 PLN. Macroeconomic data from the country also had a limited impact on the Polish currency. Industrial output increased by 7.4% year-on-year in February, 0.7 percentage points below consensus. In turn, the growth dynamics in the construction industry amounted to 31.4% in the same period (compared to 30.5% a month earlier). However, producer inflation (PPI) failed to meet expectations. It amounted to -0.2% year-on-year, although market expectations indicated an increase of 0.2%. The calendar of scheduled macroeconomic data publications does not contain any significant events today and the market's attention may already be drawn to tomorrow's Federal Reserve decision on the European Economic Area (EEA) interest rates.

Tomorrow's preview

The data on February's consumer inflation in the UK seems to be the most important macroeconomic publication on Tuesday. It has not fallen below 3% year-on-year since September last year, putting at the same time significant pressure on British wages, which are growing at a slower pace than inflation - as a result, real wages are falling. The market consensus indicates a fall in inflation to 2.8% per year. A reading of around 3% (or more) could support the pound because it increases the chances for rate hikes faster than assumed, but on the other hand, it could be harmful to the economy in the longer term (i.e. through stagflation risk, lower consumption in the economy).

At 11.00 a.m., the ZEW Institute will publish the economic sentiment index for the eurozone and Germany. In both cases, the median of market expectations indicates a depreciation of the indexes to 28.1 pts and 13.1 pts respectively. Although the economic situation of both the eurozone as a whole and its largest representative remains good, the decline in sentiment is connected with the risk of imposing additional duties on products imported from Europe into the US. Therefore, a significant fall in these indexes could worsen the euro's condition and translate into drops in the European share markets. This, in turn, is not a good scenario for the zloty, which, especially recently, has clearly lost its value in similar conditions.