Daily analysis 05.12.2017

Strong pressure on the pound after the lack of an agreement between London and Brussels regarding Brexit. Mixed data from the eurozone including a confirmation of good PMI indexes, retail sales were the lowest in three years. The zloty remained stable before the statement and conference after the MPC meeting.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 4:00 p.m.: November's ISM reading from the service sector (estimates: 59 pts),
• 4:00 p.m.: Statement and press conference after December's MPC meeting.

Strong pound depreciation

Even yesterday, around midday, the GBP/USD pair was traded above 1.3500 level and the pound in relation to the zloty tested the 4.80 level. The increases on the sterling were provided by multi-sourced expectations that a statement was prepared by PM May and Head of the European Commission Juncker on resolving the key issues concerning the first phase of Brexit and the possible start of negotiations on future trade relations between the EU and the UK.

After a few hours, during the short press conference of the British PM and the Head of the EC, it appeared that there was no agreement and the talks would continue in the following days. The pound has clearly depreciated (nearly 1%) and despite the fact that it stabilised this morning, another downward wave was present before midday which forced the GBP/USD pair to go down to 1.3370 and the GBP/PLN to 4.74.

The disagreement was probably caused by the opposition from the Democratic Unionist Party (DUP). This North Ireland group is a coalition member of the PM May's cabinet. In talks with Brussels, the London Government agreed that after Brexit there would be no physical border between the land of Northern Ireland and the Republic of Ireland. To some extent, however, the border between the EU and the United Kingdom would be located in the maritime part of Northern Ireland and continental part of Great Britain, which, according to representatives of the DUP, is not an option. It is also worth noting that the dispute between the DUP and London raises at least two further issues.

First of the aforementioned issues is the stability of May's government. Without the support of the Northern Ireland party, it loses a majority in the House of Commons, which increases the chances for early elections. Another problem is the situation in Scotland. Quoted by the Wall Street Journal, Nicola Sturgeon, Chairwoman of the Scottish National Party, said that if Northern Ireland were to receive a special offer, it should also be received by Scotland. Therefore, in the last hours, the risks to the pound have clearly increased, although a day ago it seemed that the agreement was extremely close.

Weaker than expected PMI data for the service sector may also deteriorate the British currency's condition. After good readings from construction and manufacturing, a solid publication from the services was expected. However, the index fell to 53.8 points (from 55.6 points, 55.0 points were expected). According to the IHS Markit and CIPS data, the creation of payrolls was at 7 month lows and November surveys also indicate that optimism for the next year is lower than the long-term average. However, in the coming days, Brexit-related reports will be the vital for the sterling. If the agreement moves away and the danger of other risks materialising (stability of government, Scotland) increases, then the pressure on the GBP may increase significantly. However, if the concerns about Northern Ireland were to be resolved quite quickly, then the pound should pare the losses.

Weaker data from eurozone

In the morning, the IHS Markit confirmed preliminary PMI readings for the eurozone's service sector (56.2 pts). Weaker than expected reading of retail sales from the single currency area could have been a negative surprise. It grew only by 0.4% YOY, with a consensus at 1.6% YOY. Additionally, it was the weakest publication for over 3 years.

However, in the data published by Eurostat, the significant decrease in the category of "clothing and footwear", which amounted to 4% YOY, should be noted. Since in whole retail sales this category represents only 10%, it means that the overall reading was reduced by at least 0.5 percentage points, assuming that it will grow in the long term. However, this does not fully explain the lower reading. The increase in sales volume in the food category was small (only 0.2% YOY). Sales of electrical devices and furniture also grew below the trend of the last few months. At this point in time, a poor reading of retail sales is probably a one-month disturbance, but if data were to fail in subsequent periods, this could mean that consumers are becoming more cautious.

MPC statement

The zloty remained very stable. The EUR/PLN quotations were very close to the 4.20 boundary. Increased volatility in other currencies is practically only caused by movements on the global market. Among other things, the pound is approx. 0.5 PLN below the levels from yesterday's midday.

Today, the market's attention is drawn mainly to a statement from the MPC after December's meeting. It seems that its textual part will probably not change significantly compared to what we saw a month ago. However, a press conference may be more interesting. In November's NBP projections, inflation in Q4 was expected to not exceed 2.0% YOY. Now, the data indicates that it will be around 2.3% YOY in this period, which means that the expected slight slowdown in price growth may also be weaker than anticipated at the beginning of the year. If this issue dominated the press conference and turned out to be a worrying signal for an increasing number of members, then it is possible that this might have a positive impact on the zloty. However, if these events are evaluated as "temporary", the zloty may even slightly depreciate.