A weaker pound, a stronger dollar (Afternoon analysis 06.08.2018)

Uncertainty around the shape of the Brexit has a negative effect on the pound. The dollar, on the other hand, continues the appreciation trend, with the zloty losing slightly.

EUR/USD increasingly close to dropping below 1.15

Yesterday's statement by UK Trade Secretary Liam Fox that the risk of hard Brexit (without a deal) has risen and 'is more likely than not' has put a lot of pressure on the British currency. The pound in relation to the dollar dropped to around 1.29, the lowest level since 5th September last year. Fox's view today was somewhat countered by Prime Minister Theresa May's spokesperson, who said that 'the most likely scenario is to reach a good agreement'.

However, the British currency was losing most of the day and the positive news from the Prime Minister was not able to improve the sentiment significantly. This division within the government increases the uncertainty as to the actual shape of Brexit, or rather, the negative news for the pound.

In turn, the dollar continued to grow stronger today. The euro/dollar exchange rate (EUR/USD) has fallen to its lowest level in the last 13 months (today approx. 1.153). The euro was affected by weak data from Europe's largest economy. Orders in the German industry sector fell by 4% on a monthly basis in June, the deepest fall in the last 15 months.

The zloty lost a little today, mainly due to the strength of the dollar, although the scale of changes was small and was within the range of fluctuations of previous days. The likelihood of significant changes in the Polish zloty is limited today. The risk for the Polish currency could be a fast deterioration of the sentiment on the stock market and appreciation of the dollar. Although further falls in the exchange rate of the main currency pair (EUR/USD) even closer to the multi-month lows could put pressure on the zloty, its relatively good condition may protect it from a deeper adjustment.

Tomorrow's preview

The calendar of planned macroeconomic publications isn't abundant tomorrow. Destatis will publish Germany's international trade in June data at 8 a.m. A median of market expectations indicates an increase in the trade surplus by 1.1 billion to 21.4 billion euro.

Given the relatively weak condition of the euro at present, a much better-than-expected trade balance reading could support the single currency, but the market could focus much more on June's industrial production data published at the same time. In the context of today's much worse than expected orders in this sector, a drop in production of more than 0.5% on a monthly basis (the current market consensus) may further weaken the euro.

However, potential changes in the value of the single currency tomorrow are likely to be rather limited. In addition to political developments and the tariffs dispute between China and the US, market's focus may be on Friday's inflation figures for the US. Therefore, it is only at the end of the week that we can expect more significant movements on the currency market, not counting those caused by unexpected media reports.