Afternoon analysis 16.10.2017

Reports of a possible break in the Brexit negotiations have weakened the British currency. In turn, the zloty appreciated due to a slightly weaker dollar in the afternoon and better than expected current account balance data.

Pound has depreciated

Monday's trading on the FX market was relatively calm, despite geopolitical tensions (Middle East). They mainly affected some of the energy commodities, i.e crude oil, which gained approx. 2% in value. There was a relatively good sentiment in the market as well - most of the main European stock indexes have appreciated.

The Bloomberg news agency reported before 3 p.m. that the Brexit negotiations could fail if some if the EU negotiators do not signal the continuation of talks. Therefore, in response, the British currency's value fell sharply - the GBP/USD exchange rate dropped suddenly by 50 pips from 1.3300 to approx. 1.3250. The summit of EU leaders starts on Thursday and it is probably that part of the negotiation strategy and France and Germany will want to tighten their positions, taking into account the external and internal issues of the UK. This can result in pressure on the pound and limit its potential increases.

In turn, the main pair quotations, i.e. the EUR/USD, remained relatively stable and were around the 1.18 level. At 2.30 a New York Federal Reserve branch published an industrial activity index for the New York region. The activity in the sector measured by this index has risen to its highest level for over seven years. Although it is rather secondary data in terms of the impact on the dollar, a limited calendar in the following hours can make the dollar enjoy a higher demand and appreciate.

Zloty slightly stronger in the afternoon

The next few trading hours brought a slight appreciation of the zloty. It could be due to good sentiment still noticeable on the market and a slight weakening of the dollar. The current account data for August, which turned out to be better than expected, could also provide a positive argument for the zloty's strengthening. The deficit was 100 million EUR compared to 622 million EUR and was the lowest since January (when the highest ever surplus of 2.6 billion EUR was recorded).

The EUR/PLN trading increased the last lows and fell to the lowest level since September 7th - one euro cost approx. 4.2350 PLN. The zloty appreciated also around 0.2% in relation to the Swiss franc, and the CHF/PLN quotations reached the lowest level since January 2015 (the moment of releasing the peg to the euro by the Swiss Central Bank).

Tomorrow's data on wages and employment from the Polish Central Statistical Office (GUS) could support the zloty. If the GUS publication meets the market expectations and confirms positive trends taking place in the Polish labour market, the zloty may remain strong. At least until Wednesday, when we learn more important data on industrial production and retail sales in September.

Tomorrow's preview

Unlike today, the calendar of scheduled macroeconomic events is relatively rich. Already at 10:30 a.m. The Office for National Statistics (ONS) will present September's data on consumer inflation in the UK. In the previous month, it reached four-year highs (2.9% in annual terms) - the median of market expectations currently indicates an increase to 3%.

Although the Bank of England has already suggested at the last monetary committee meeting (in September) that monetary tightening is possible in the nearest future, the inflation's publication may still cause significant fluctuations in the pound's quotations. In particular, if it turned out to be much weaker than expected (0.2 percentage points or more), the pound could depreciate.

At 11 a.m., the ZEW Institute will publish the data on the sentix economic index for the eurozone. Despite the worse than expected readings in recent months, the ZEW economists' sentiment has still been high. The market consensus points to a further increase in October, which could confirm the good situation in the single currency area and consequently support the euro.

At 3.15 The Federal Reserve will present September's data on industrial production in the US. Last month it turned out to be much worse than expected - its decrease of 0.9% per month was the largest since March 2016. A weaker result was also recorded by its main component, i.e. manufacturing production, which dropped by 0.3%, although a 0.3% increase was expected. The median of market expectations points to an increase in both of 0.3% and 0.1%, respectively, on a month-over-month basis. In the case of a reading in line with consensus or higher, the dollar could get an argument for appreciation after worse than expected inflation data in September (published last Friday).