Afternoon analysis 13.03.2017

The Prime Minister of Scotland announces that she will start the legal process for a second independence referendum – the pound, however, remains stable. The Polish currency remains weaker, although with little changes to the morning’s trading.

A referendum even before Brexit?

While Theresa May, the Prime Minister of Great Britain, has been preparing to trigger Article 50 of the Lisbon Treaty, Nicola Sturgeon, her Scottish counterpart, suggested that she will be preparing the legal process for a second independence referendum. This subject has been circulating ever since the surprise result of the June referendum in Great Britain.

Scotland has been very keen on keeping access to EU’s single market. Hence, Sturgeon would prefer to hold a referendum, once Brexit terms are disclosed, between autumn 2018 and spring 2019. However, the matter is not quite so straightforward, even in Scotland. Ruth Davidson, the leader of the Conservative Party, said that the call for a second independence referendum was a “path of further division and uncertainty”, and indicated that she would vote against such a move.

The relatively distant prospect of the potential referendum and opposition against it in Scotland were probably amongst the reason why the British pound reacted calmly to the news. It traded in relation to the dollar (GBP/USD) in a narrow range close to the 1.22 level. Volatility could return as soon as Wednesday, as January’s average earnings data will be published before midday. The lack of planned economic data today caused the dollar to trade in a tight range as well – the EUR/USD pair oscillated between 1.066 and 1.067 until 3 p.m.

Zloty stable after earlier decline

After the morning’s depreciation, among others, caused by the new report on inflation published by the National Bank of Poland, the zloty stabilised. However, the current market sentiment isn’t particularly favourable for the Polish currency. After hawkish signals coming from the European Central bank, surprisingly dovish stance of Adam Glapiński (chairman of NBP) and today’s report on inflation which didn’t help the zloty, the next event on Wednesday could prove vital: the decision and statement from FOMC (Federal Open Market Committee). Should it so happen that more than three rate hikes in 2017 are suggested, the combination of all these factors could lead to a higher aversion towards Polish government bonds and result in a depreciation of the zloty as well.

Tomorrow’s preview

At 11.00 a.m. ZEW will publish the economic sentiment indicators for the eurozone and Germany. The general trend seen in recent months has been positive in both economies, albeit with a little decline of the sentiment in February. The median of expectations points to an increase of sentiment in March in both cases. This should confirm the overall positive trend in the eurozone economies to which “hard” macroeconomic data point.

Taking into account the recent hawkish signals coming from the European Central Bank, a return to the positive upward sentiment trend could support the euro. However, one should note that, at the same time, Eurostat will publish January’s data regarding industrial production in the eurozone, which is known to be relatively volatile. This could potentially, negatively impact the sentiment data, in the case of worse than expected growth in the industrial sector. The activity in this sector increased in the preceding months: in December, the increase was 2% YOY, 0.3 percentage points above expectations. Market consensus points to a 0.9% YOY increase in January.

At 2 p.m. the Central Statistical Office (GUS) will publish February’s consumer inflation data (CPI) in Poland. In December, the index grew by 0.8% YOY, while in January by as much as 1.8% YOY. The market expectations point to a 2.1% growth in February. Wednesday’s reading probably won’t cause high volatility in the value of the Polish zloty, taking into account the reasons behind the recent pickup in inflation (mainly due to the increase in energy commodities) and also because it has been observed to increase globally. However, Wednesday’s Core CPI data could prove more important for the zloty, especially if it exceeds expectations (0.4% YOY), it could cause the Polish currency to appreciate (and let’s not forget about the relatively dovish tone of the recent Polish Monetary Policy Committee press conference).

The Bureau of Labour Statistics (BLS) will share tomorrow at 4 p.m. the February change in producers’ inflation (PPI index). Similarly to the consumers’ inflation (CPI), the producers’ inflation has risen in recent months relatively quickly – in July it was still negative (at -0.2% YOY) while in December the reading showed +1.6%. The market consensus for February points to further growth in producers’ inflation to 1.9% YOY. Similarly, like in the case of the Core CPI, the increase in the Core PPI index hasn’t been so clear. In January, it was 1.2% YOY while in November and December 1.6%. The median of market consensus suggests the Core PPI to grow to 1.5% YOY. Should the reading deviate from the consensus, it could increase the dollar’s volatility. In the case of a reading above expectations, the dollar could appreciate.