Daily analysis 18.01.2017

18.01.2017 11:20|Marcin Lipka

Theresa May’s testimony caused the pound to achieve its larges one-day growth since 1993. Relatively hawkish comments from Lael Brainard of the Federal Reserve. The zloty is slightly stronger against the euro. The USD/PLN is below 4.10.

Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.

  • 14.00: Data regarding salaries and employment from Poland for December (estimates: positive 4.0% YoY and positive 3.0% YoY, respectively).
  • 14.30: CPI from the USA (estimates: positive 2.1% YoY, excluding food and fuel: positive 2.1% YoY).
  • 15.15: Industrial production from the USA (estimates: positive 0.6% MoM).

Pound’s large growth

Yesterday’s change of the pound’s evaluation against the dollar was spectacular. The GBP/USD started the session slightly above the 1.20 level and finished near the level of 1.24. According to Bloomberg’s calculations, an approximately 3% growth was the pound’s strongest one-day appreciation against the dollar, since 1993. What has caused this significant move?

There were a few reasons. One of them were the changes on the American currency. The dollar’s index went below 1% and the EUR/USD increased approximately 100 pbs. This gave a positive start for the GBP/USD before Theresa May’s testimony.

The second element was the above mentioned testimony from the British prime minister. Her recent statements regarding Brexit were unclear. Since weekend, the local press has been publishing excerpts from May’s testimony, which suggested a “hardcore” Brexit. This scenario was also confirmed by a conservative think tank, Policy Exchange. Its publication contained clear suggestions that the United Kingdom would do much better outside of the Single Market, due to the freedom of creating independent economic policy.

As a result, expectations regarding May’s testimony were relatively low. However, her speech showed that the United Kingdom has a specific and coherent plan. The UK authorities will most of all strive to sustain its access to the Single Market as wide as possible. Nevertheless, the strategy of sustaining the current trade conditions with the EU generates costs. Therefore, the UK government will not push too strongly to achieve this goal.

The announcement that the British parliament will vote over the Brexit conditions, can be considered as a signal of hypothetical compromise. This is because the final agreement will have to satisfy the pro-European Labor Party, as well as these members of the Conservative Party, who are skeptical towards “hardcore” Brexit.

The recent macroeconomic data is another positive element for the pound. Inflation for November increased by 1.6% YoY, which was by 0.2 percentage points higher than the consensus. This increases the chances that the Bank of England’s monetary policy will become less mild than it is now.

In conclusion, we can expect the Brexit-related emotions (except for a formal initiation of the Article 50) should calm down for a while. Therefore, the market will be able to focus more on the macro data, which remains relatively positive. These arguments decrease the likelihood of the pound returning to its recent minimum and increase the chances for further growths. Moreover, the pound may even return to its maximum from December.

Brainard on fiscal policy

Due to information from the United Kingdom, as well as to the comments from Donald Trump from the Wall Street Journal, the market most likely missed the statements from Lael Brainard. The Fed governor council representative (with a permanent right to vote) has been considered as one of the most dovish FOMC members. In her yesterday’s testimony in Brookings Institution, she suggested that more expansive monetary policy may cause the necessity of more rapid rate hikes, as well as of sooner than expected reduction in the Fed’s balance.

Due to the fact that Brainard’s attitude has usually been considered more dovish than Yellen’s, we may expect that as soon as there is a plan of fiscal stimulation (consensus between Trump and Republicans), the FOMC may even suggest the necessity of raising interest rates each quarter as for the second half of 2017. This would be a positive signal for the USD.

Positive condition of zloty

The zloty was doing relatively well yesterday. However, the sentiment was positive for the forint as well. The dollar’s global wear-off caused the USD/PLN to reach the area of 4.08. The zloty strengthened against the euro as well, which caused the EUR/PLN to go approximately 0.01 PLN down.

A relatively positive condition of the PLN also caused that the pound’s growth against the zloty was not as spectacular, as it was against the dollar. The GBP/PLN increased by approximately 0.07 PLN. This was approximately 1.5% change. However, if investors focus more on the macroeconomic data, the British currency may go clearly further from the 5.00 level.



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