Afternoon analysis 15.12.2017

15.12.2017 15:23|Bartosz Grejner

The European Union's talks with the United Kingdom officially entered the second phase, but the British currency still depreciated. The dollar gave up some of its profits - the EUR/USD pair returned to around the 1.18 level. The zloty strengthened in relation to the main currencies, although it remained in a weaker condition. Next week's industrial production and retail data could help the Polish currency.

Pound under pressure

Today, a slightly weaker pound was observed in the morning. However, information about the formal start of the second phase of Brexit talks between the EU and the United Kingdom caused further depreciation of the British currency. Bloomberg reported that talks regarding the transition could begin in the upcoming weeks. On the other hand, talks regarding the trade exchange are expected to start after the summit in March.

The pound depreciated in relation to the euro and the yen by around 1% as well as to a slightly weaker dollar by 0.8%. The British currency has been under pressure due to the fact that the next stage of discussion with the EU is likely to be much more difficult because of the different interests and priorities of the foreign trade between different member states. Moreover, Wednesday's decision from the British Parliament allowing it to implement Brexit agreement has further weakened PM Theresa May's position, which may increase uncertainty among investors.

After yesterday's strengthening in connection with the ECB monetary policy press conference, the dollar was in slightly worse shape today. The EUR/USD quotations returned to 1.18. At 3.15 p.m., the Federal Reserve will publish data on industrial production in November.

After October, which appeared to be much better than expected, the growth pace in the industrial sector may slow down slightly. The market consensus indicates that the main production index will increase by 0.3% per month and its largest component (manufacturing production) will also increase by 0.3%. In the case of readings exceeding market expectations by 0.2 - 0.3 percentage points, the dollar could appreciate and the main currency pair quotations would fall significantly below the 1.18 limit.

Zloty pared some losses

Although in the context of the last few days, the Polish currency has been in a slightly worse condition (given the favourable external factors). Today, its strengthening was observed. The zloty became significantly stronger against the globally weaker pound due to the uncertainty surrounding the Brexit process and the internal problems of PM Theresa May’s government. The GBP/PLN rate fell slightly below 4.76 around 3.00 p.m., completely reversing the last three days' growth. However, this pair's quotations may still be sensitive to significant changes caused by external factors.

The zloty appreciated in relation to the dollar and the euro, although the gains were clearly smaller. The EUR/PLN quotations fell below 4.22. It seems that the return to around 4.20 would only result in better than expected data on industrial production and retail sales, combined with still solid wage growth (approx. 7%). In subsequent hours, the probability of significant changes in the currency market and the zloty's valuation seems to be limited. The relatively weak condition of the Polish currency has been still visible in relation to the regional forint - the zloty has lost nearly 1% since Tuesday in relation to the Hungarian currency.

The aforementioned data on industrial production in the USA may cause some volatility for the Polish currency, although it should be limited mainly to the USD/PLN pair. A significant increase in production, which could result in the EUR/USD’s depreciation to move to around 1.175, could also contribute to the return of the USD/PLN pair above 3.58.

Next week's preview

The beginning of next week may be relatively important in the context of the zloty's trading. On Monday at 2.00 p.m., the Polish Central Statistical Office (GUS) will publish data on wages and employment in the enterprise sector for November. Employment is expected to grow at a pace of 4.4% per year. The growth pace this year was in a relatively narrow range of 4.3% to 4.6%.

Data on changes in the average wage level in this sector may turn out to be somewhat important. In October, average wages grew at the pace of 7.4% per year, the fastest in almost 6 years, at the same time exceeding market expectations by 0.9 percentage points. In November, the median expectation is expected to slightly slow down to 7.1%. The high pace of wage growth may put pressure on inflation, so a reading around its 6-year records could slightly strengthen the zloty.

On Tuesday, in turn, the data regarding industrial production and retail sales in November will be published by the Polish Central Statistical Office (GUS) at 2 p.m. The production growth in October amounted to 12.3% per year and was the highest it’s been in seven years. The market consensus indicates an increase in production by 9% in November. A reading of about 10% combined with an increase in retail sales of at least 7-8% could strengthen the zloty, as this could slightly increase the probability of a better than expected economic growth rate in Poland in Q4.

 


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