Afternoon analysis 29.03.2017

The United Kingdom has officially initiated the Brexit process. The zloty remains in a positive condition.

Brexit process has begun

Today’s hot topic is Brexit. At approximately 13.30 the European Council chairman received an official letter, which informed about the United Kingdom leaving the European Union. This has initiated the two-year process, in which the UK will try to negotiate the best possible conditions of Brexit. The European Council chair, Donald Tusk, has announced that the EU will reply to the notification within forty-eight hours.

Meanwhile, Theresa May made her testimony in the British parliament. She claimed that the British government will strive to achieve an ambitious and bold trade agreement with the EU, as well as to maintain the access to the European Single Market. May emphasized that the UK does not reject the EU values and wishes that the EU prosper as much as possible. Some of the British parliament members suggested that access to the European Single Market is crucial to keep the British labor market in a positive condition.

The pound gained value. However, the official initiation of the Brexit process, as well as the second independence referendum in Scotland will most likely cause volatility of the British currency. The GBP/USD increased from 1.238 to 1.243. Moreover, the pound has gained approximately 0.5% against the euro.

Shortly before 14.00, the EUR/USD was pushed from 1.08 to 1.074. This was caused by information (from Reuters, among others) that the market was wrong to discount the news about the potential monetary tightening from the ECB. An increase in debt cost would be problematic for Portugal, Spain and Italy, because it would decrease their economic growth.

Zloty is stable

The zloty remains stable, especially considering the external factors. The EUR/PLN remains below 4.24. Moreover, the zloty remains at yesterday’s level against both the franc and the forint.

However, the zloty wore-off slightly against the pound, as well as against the dollar (by 0.2% and 0.4%, respectively). Nevertheless, these levels are still near a four-month minimum. The zloty’s condition has been emphasizing the positive sentiment towards the emerging market currencies.

Tomorrow’s events

At 14.00, Destatis will publish the initial data regarding the German CPI for March. Over the past few months, this index has been increasing quite rapidly. In November, the CPI was at the level of 0.8% YOY, only to reach the level of 1.9% and 2.2% in January and February, respectively. This rapid increase was caused by the growth of the raw material prices (mainly of oil).

However, raw material prices have become stable. Therefore, this factor’s impact on inflation growth should decrease slowly. The market consensus regarding the German CPI growth for March is at the level of 1.9% YOY. However, the European Central Bank cares more for baseline inflation, which has not been increasing as much as main inflation.

At 14.30, the Bureau of Economic Analysis (BEA) will present the third reading regarding the American GDP growth for the third quarter. The two previous readings were both at the level of 1.9% YOY. Currently, the market consensus is at the level of 2% YOY. Taking into consideration the recent fluctuations on the dollar, the BEA reading may increase the American currency’s volatility. If the reading is better than estimated, the dollar may gain value.

Also at 14.30, the American Labor Department will publish the weekly jobless claims. Even though last week’s result of this index was worse than estimated (258k vs 240k), the insured unemployed rate went down to 1.99 million people, which was this index’s best result in approximately seventeen years. If the new Labor Department data is positive, this will confirm a strong condition of the American labor market and support the dollar.