Afternoon analysis 29.02.2016

The EUR/USD falls below the 1.09 mark after the eurozone inflation data and reserve requirement ratio was cut by the PBOC. The pound remains under pressure regarding the scenario of Brexit. The EUR/PLN falls toward the 4.35 level.

Both the pound and euro are under pressure

In the afternoon trading, the EUR/USD fell to around 1.0880. The depreciation is mainly caused by lower than expected inflation readings from the euro zone, which increases the odds that the ECB will both cut the benchmark and increase the QE during its meeting on March 10th.

Additionally, People's Bank of China (PBOC) cut its reserve requirement ratio (RRR) in late morning. Since that moment, the S&P 500 future contracts rose around 15 points (0.7%). The market seems to regard the Chinese decision as positive. It would lower the risk that the country might experience hard landing with the GDP falling below 6% growth. Moreover, it should also be positive for the dollar. In more benign market conditions there are greater odds that the Fed would resume its interest rate policy tightening.

Concerning the pound conditions, the UK currency is still traded at about a 7-year low to the dollar. The cable is under pressure, mainly from further comments sent by financial institutions. Reuters UBS, claims that, “sterling could fall to parity with the euro if Britain is to leave the European Union in June.”

The Swiss bank also notes that there is a, “40 percent chance for a Brexit.” The scenario for such strong depreciation is, “based on the devaluation required to reduce Britain's high – 4.7% percent of GDP – current account deficit back to long-term averages of approximately two percent.”

If we translate the UBS analysis directly to the Polish market and assume that the zloty remains stable to the euro and the pound, in a case of Brexit, would be worth around 4.35 zl. However, it is possible to imagine Brexit, but the parity on EUR/GBP is a rather low-probability event.

Currently, the pound is worth around 1.27 euro. It means that the British currency would have to slide to around 22% to its European counterpart. Additionally, the USD would probably gain to the euro, taking into account that Brexit would also bring some pressure to the euro. Finally, the GBP/USD could fall around 25-30% (the sum of a weaker pound to the euro and a stronger dollar to the European currency) to around 1.00 level, the lowest levels in history.

Such a dramatic scenario has a very low probability to materialize. However, the more similar analysis hit the wire that there are more odds that the pound might fall further than ever before the referendum is concluded. As a result, the GBP/USD may be pushed toward 1.35 (30-year lows) in the following weeks.

The zloty is testing 4.35 on the euro

The EUR/PLN fell to around 4.35 in the afternoon. These are the lowest levels since mid-January. The main reason behind a euro/zloty fall, is weaker European currency on the broader market due to lower CPI reading and increasing odds for further monetary easing by the ECB.

The zloty is also stronger to the forint mainly due to an increased risk that the MPC from Budapest would loosen the monetary policy if the ECB decides to push for more easing in the euro area. As a result, until the Polish MPC remains reluctant to lower the rates, the zloty should benefit, to both the Hungarian and European currency on further monetary policy divergence.