Daily analysis 12.12.2017

The British currency remained under pressure from discussions regarding Brexit despite higher inflation readings from the UK. The ZEW index didn’t have a major impact on the euro’s valuation. The EUR/PLN in a relatively small fluctuation range. The zloty was probably waiting for statements from central banks.

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

• 2:30 p.m.: Core inflation in Poland (estimates: 0.1% MOM, 0.9% YOY),
• 2:30 p.m.: Producer inflation (PPI) from the USA (estimates: 2.9 YOY excluding food and fuel prices 2.4% YOY).

Pound's weakness maintained

This morning’s British currency trading value showed that the issue of 'divorce' conditions between London and Brussels are still a main catalyst for movements on the pound. Reports on the economy that should theoretically support the GBP are being ignored.

In November, the Island’s inflation reached 3.1% YOY and exceeded economists' expectations by 0.1 percent. Additionally, it was the highest reading in over 5 years. The increase in prices excluding fuel and food prices reached 2.7% YOY. Although the data was in line with expectations, consensus fluctuated between 2.6% and 2.7%, so it can be said that the publication was within its upper limits. This is already the fourth consecutive month when core inflation is at this level, which at the same time means almost 6-year highs.

According to the ONS (Office for National Statistics), airline ticket prices, entertainment products and services connected with entertaining (including computer games) were responsible for the price increase. It is also worth noting that inflation already exceeded by almost 1 percent to the wage increase (2.2% YOY). And although it is probable that the price increase may slow down slightly at the beginning of next year, the British purchasing power is decreasing on a monthly basis.

Moreover, production inflation was higher than the consensus, especially the one describing inflation factors. In November, they grew at a pace of 7.3% YOY, i.e. by 0.6 percentage points above expectations. However, the raw materials (crude oil), have mainly contributed to a faster price increase. Therefore, this factor can be considered as temporary.

Generally, the data tend to support a less accommodative monetary policy, which should help the pound. However, the market's response was short term. The British currency appreciated immediately after the publication (approx. 0.3%) but later fell below the pre-reading value. Market participants are more likely to be afraid that although some of the macro data would suggest further rate hikes, the tense situation between London and Brussels could hamper this process by taking a negative view of the future economic situation in the Islands.

Yesterday there was a discussion (in the media) on the future relations between the EU and UK. In an interview for Bloomberg, Liam Fox, the UK Secretary of Commerce stated that he would like to make a trade agreement with the Union, which is "as close as possible to what we have today". In turn, the head of EU negotiators Michael Barnier warned that the United Kingdom can count on a free trade agreement similar to that with Canada.

The Canadian version for the UK will be practically unsatisfactory because it covers services only to a small extent and London is mainly concerned with unrestricted access to the EU services market (especially financial ones). As a result, doubts about the initial agreement announced last week and a lack of a closer approach in the context of future trade relations increase concerns about a "harder Brexit", which prevents the pound from paring earlier losses.

Market is waiting for signals. Stable zloty

The ZEW readings did not introduce many variations. The German investors confidence index has been in the range of 15-20 points for months and also in December the index remained within this narrow fluctuation range (17.4 points). Central bank meetings in the following days are likely to have a greater impact on the global currency market (Wednesday - Federal Reserve; Thursday - Bank of England, ECB, SNB). Until then, it is likely that the movements on the main currencies may be quite small.

In the case of changes in the zloty, the Polish currency, like other foreign currencies, should wait for reports from abroad. For most of the time, the EUR/PLN will be traded between 4.20-4.21 level, which seems to be the current core scenario for the next few hours.

No big surprise should be expected after the core inflation readings from Poland (publication at 2.00 p.m.). It will probably not exceed the level of 1.0% YOY, which should maintain the MPC's relatively dovish attitude to at least the beginning of next year.