Brexit becomes real? (Afternoon analysis 10.09.2018)

Macroeconomic data was unable to exert significant changes on the pound, but the information from the head of EU negotiators did it - Brexit is very "realistic" within 6-8 weeks. The pound appreciates, the dollar depreciates and the zloty remains stable. However, the situation may change if the US imposes additional duties on Chinese imports.

EUR/USD again above 1.16

There is still no information on the potential duties that can be imposed by the USA on imports of goods from China. At night, China's main market indexes significantly lost value (over 1%), but the weaker sentiment did not translate into a European session. Both the main market indexes in Europe and futures contracts for their US counterparts were appreciating. The calming sentiment also shifted to the currency market, where we did not observe any significant movements in the emerging countries' currencies or in the quotations of the main currencies.

This slightly better market sentiment may result from the belief that the lack of announcement of additional duties by the USA means that negotiations are ongoing and perhaps duties will be avoided. However, there is no information on both sides that could indicate that the dispute can be resolved amicably. Therefore, it is most likely that duties will be introduced. The question is whether the customs duties will be applied immediately to all goods worth 200 billion USD or in tranches.

Now, such an announcement can take place at any time. In such a case, a rapid market reaction is expected. Taking into account that a slight reaction is currently observed on both the share market and the dollar, in this scenario there could be a sell-off in the share market and a significant strengthening of the dollar. Moreover, it is justified by better than expected data from the US labour market on key issues (e.g. the highest increase in the average hourly wage rate in 9 years).

Today, the British Office for National Statistics (ONS) published July's data on industrial production, production in the construction sector and the trade balance. The deficit on the latter turned out to be the lowest in nearly two years and amounted to 9.97 billion GBP, although it was expected to be 1.8 billion higher. The construction industry, where the production rate exceeded the consensus by 0.9 percentage points and amounted to 3.5 % per year, was also positive and was the highest in 11 months. On the other hand, data from the most important industrial sector failed to meet expectations because production increased by only 0.9 per cent per year, recording the slowest growth rate in 13 months.

The aforementioned data had little impact on the British currency's quotations. The GBP/USD exchange rate oscillated around 1.29. What really had an impact on the pound was the information from the head of EU negotiators Michel Barnier that it is realistic to reach an agreement on the UK leaving the EU within 6-8 weeks. For this news, the GBP/USD gained about 1% at 3:00 p.m., rising to 1,305. This is the highest level since the August 2nd. It seems that the reports on Brexit will be the ones that will determine the pound to the greatest extent. Once an agreement has been reached, the problem of making trade relations with the EU more detailed will return, which may, in the long run, soften sentiment. Fundamental factors may then play a much greater role than now.

While awaiting the decision of the USA regarding customs duties, the Polish currency remained stable. The EUR/PLN exchange rate moved between 4.31 and 4.32. The zloty is also supported by better sentiment on the share market and a slightly weaker dollar. This information on Brexit, strengthening the pound globally, also weakened the US currency. Shortly after 3:00 p.m. the euro was gaining nearly 0.5% to the dollar, and the EUR/USD exchange rate rose again above the 1.16 level. It should be remembered, that the macroeconomic data coming from the US is very good and indicates the need to maintain a fast pace of monetary tightening.

The dollar's strengthening is a matter of time, and the announcement of additional duties by the USA on imports from China may cause a new wave of appreciation. In such a scenario, the pressure on the zloty could increase significantly, and the EUR/PLN exchange rate could increase up to 4.40 even before the end of this month. Exceeding 4 PLN in the case of a dollar may not be possible in this period of time, but approaching 3.90 PLN is quite realistic.

Tomorrow's preview

At 10:30 a.m., the Office of National Statistics (ONS) will publish the British labour market report. The most important data will involve the British average wage in July. The median of market expectations indicates that the growth rate (including bonuses) will remain at the level of 2.4% per year. It has been declining gradually since February when it was 2.8%. Although the biggest impact on the pound's quotation is now the Brexit issue, a fall below 2.4% may further reduce the pressure on potential interest rate increases and ultimately weaken the pound to some extent.