Inconsistent rumours before the ECB meeting. The pound is slightly supported by the better polls for the Conservatives. The oil tumbled yesterday. The zloty is slightly weaker compared to major currencies. The pound near the the 4.85 PLN mark. Significant risks for the sterling after the election.
Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.
- 13.45: Decision on interest rates in the euro zone (estimates: 0.0%, deposit rate minus 0.4%).
- 14.30: The ECB statement combined with the Q&A session and new central bank macroeconomic projections.
- 23.00: Exit polls estimates after the House of Commons election.
Inconsistent signals for the euro
In our afternoon analysis we noted Bloomberg's rumours of hypothetical downgrade of the ECB inflation projections. However, after a few hours this information was contrasted with the Reuters news. Its own sources informed that the inflation reduction will be small. As a result, the EUR/USD has returned to levels before Bloomberg's message.
In general, however, investors’ reaction was probably already exaggerating regarding the first report. Whether the ECB model will show a slightly lower projection, for example due to the fall in fuel prices, is probably not a significant change for the Monetary Authority. The ECB focuses more on the core inflation which exclude both the energy and food.
Secondly the most important issue is the tweak in the statement (we wrote about it extensively yesterday). Will the elements related to the possibility of further interest rate cuts or risk assessment for the economy be removed? If both issues are addressed it ma be expected that the euro could benefit from such changes.
It is worth noting, however, that apart from the official statement there is also a press conference. The odds seem to be higher that the Q&A session with the ECB chief Mario Draghi will be more dovish than market expects. Draghi can cut all speculation about the earlier expected exit from the QE. Moreover his inflation risk assessment (especially the core one, after May’s data) may suggest that we are very far from any noticeable monetary tightening. As a result, there is probably a slightly higher chance that the euro may weaken rather than strengthen
Slightly better polls for the Tories
The most recent UK polls have been showing a slight increase in support for the Tories. Currently the average Conservatives’ lead over the labour party is close to 8 percentage points (43.6 vs 36.8 percent). The previous 10 polls gave the ruling party a lead around 6 percentage points.
It may be assumed that the negative trend for Theresa May has been recently stopped. In fact, most uncertainty is still being generated by the widely-discussed YouGov model. Its latest update (yesterday) suggests that the Conservatives result may be very weak. It predicts only 302 seats in the Tories, which is 24 seats short of majority (42 percent for Conservatives and 38 percent for Labour). It would also be a significantly worse result than achieved in 2015.
The YouGov model is also the only one which suggests a hung parliament. If such scenario was realized, it could lead to a significant pound devaluation. According to the economists’ median projections surveyed by Bloomberg the GBP/USD would fall to 1.2350.That's about 5 percent slide.
On the other hand, according to the bookmakers (Oddschecker data) the risk of "hung parliament" is limited to about 17%. Relatively accurate results of the elections to the House of Commons should be known at 11.00 pm, when the exit polls are expected to be published. Despite the facts that in 2015 they were somewhat misleading (conservatives were underestimated 15 seats), if the parliamentary majority (325 seats) is exceeded by at least 50 seats, the pound may gain about 2 percent just when the projections hit the wire.
Yesterday afternoon the zloty weakened significantly. This was not the result of a press conference after the MPC meeting, as no breakthrough information occurred during that event. In the afternoon, however, there was a significant decline in crude oil due to an increase in inventories and a drop in US demand. Although the lower valuation of this commodity is beneficial to the Polish economy (lower cost of its operation, better balance of trade), such sudden decline in the WTI or Brent has resulted in the depreciation of commodity currencies (Canadian dollar, Russian rouble) and slightly worsened global sentiment. The zloty has been recently very sensitive to even a slight changes in sentiment.
In the afternoon the zloty may react to a message from the ECB. If the EUR/USD is pushed lower the USD/PLN may be moved toward the range 3.75-3.76 range. The range of moves on the pound to the Polish currency may be significant regarding the outcome fo the UK election. The GBP/PLN pair may be moved toward 5.00 if the Conservatives receive at least 50 seats majority. On the other hand in case of a hung parliament the slide toward 4.60 PLN cannot be excluded.