Brexit as a burden to the pound (Afternoon analysis 17.07.2018)

The British currency depreciates due to uncertainty about Brexit. Industrial production in the US increased in June, but the decline in May was more pronounced than expected. The zloty is relatively stable.

EUR/USD close to 1.17

Today, the British Office for National Statistics (ONS) published data on the average wages in Great Britain, which was in line with expectations. Average wages in the Islands (including bonuses) increased by 2.5% year-on-year in May. The situation in the British labour market is still very good - the percentage of employed in May (16-64 years) amounted to 75.7% and was the highest since 1971.

This data is likely to have a rather limited impact on the pound, with the market focusing more on the Brexit issue and Prime Minister Theresa May's problems in designing an exit plan from the European Union. May meets with the opposition not only in the Labour Party but also within his own ranks.

The Brexit issue and the introduction of an additional uncertainty factor are enough to put pressure on the pound. Today, the British currency depreciated in relation to both the dollar and the zloty. Before 3:00 p.m., the GBP/PLN exchange rate dropped to around 4.83 PLN, the lowest level since June 11th.

The zloty's quotations against the other main currencies remained relatively stable and close to yesterday's closing levels. The EUR/PLN oscillated around the 4.30 PLN at 3:00 p.m., although a moment earlier it even approached the 4.29 PLN boundary. Today, the zloty is supported by better than expected data on wages (an increase of 7.5% per year against a consensus of 7.0% per year). On the other hand, a slightly worse sentiment on the share market and a better dollar may exert a negative pressure.

The EUR/USD quotations have been gradually falling since the midday, crossing the 1.17 limit. Today, the Federal Reserve also published June's data on industrial production in the US, but it has turned out to be somewhat mixed. Although production increased by 0.6% month-on-month (by 0.1 percentage points year-on-year above expectations), May reading was revised downward to a 0.5% year-on-year drop (from 0.1%). As a result, the dollar will most likely fluctuate around 1.17, which also suggests that the zloty will stabilise at current levels.

Tomorrow's preview

At 10:00 a.m. the Polish Central Statistical Office (GUS) will publish data on industrial production and producer inflation (PPI) in June. The market will focus mainly on the first index. The median of market expectations shows an increase in production by 6.1% a year, compared to 5.4% a month ago. If the reading from this sector were surprising, as is the case today with the wage data, the zloty could receive further support.

At 10:30 a.m., the ONS will publish June's Consumer Inflation Index (CPI) in the UK. The core inflation will be with the highest importance in this report, which in the previous month fell to 2.1% year-on-year. The market consensus suggests that this level is maintained, but if the inflation rate were lower, it would fall to its lowest level since March last year.

At 11:00, Eurostat will provide the same data for the eurozone. However, this will be the second reading, thus the chances for significant changes are limited. The median of market expectations indicates that both the headline inflation index and the core inflation index remain unchanged compared to the preliminary data from the end of June (2.0% and 1.0%, respectively, year-on-year). However, if inflation turned out to be lower (especially in the case of core reading), it would be bad news for both the euro and the zloty, which could be under pressure.