Daily analysis 22.05.2017

The pound has become weaker due to both the news regarding Brexit and the unfavorable surveys for the Tories. The dollar remains under pressure in spite of an increase in the profitability of US bonds. Oil quotations are increasing before the OPEC meeting on Thursday. The zloty has been stable against the majority of currencies.

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

• No macro data that could significantly impact the analyzed currency pairs.

Brexit and British elections

Last week, we took note that the macroeconomic data from the United Kingdom is fairly positive and that it could support the pound if it weren’t for Brexit. However, anxiety over the UK’s economic condition and its relationship with the European Union has recently increased.

David Davis, the British Secretary of State for Exiting the European Union, told the Sunday Times that the United Kingdom may resign from negotiations with the EU unless Brussels ceases their demand of 100 billion euros as a penalty for the UK leaving the EU. The Sunday Times also cites Prime Minister Theresa May, who claimed that the EU should also take into consideration the funds that have already been deposited.

It’s difficult to say whether these statements are related to the forthcoming election to the House of Commons (the 8th of June), or if they have proven a decrease in the will to come to an agreement with the EU. It’s also worth noting that “the Brexit bill” has not been officially presented by Brussels. Moreover, the 100 billion euros was mainly mentioned by the financial press (Financial Times), as well as by European think tank, Bruegel.

The recent surveys may have also been negative for the pound. In the beginning of May, the Tories had an approximate 14%-20% advantage over the Labor Party. However, four recent surveys (two for Survation and one for each YouGov and ORB) showed that this advantage has decreased and is currently within the range of 9%-12%. Two years ago, the Conservative Party won by 6.6 percentage points against the Labor Party. If the current election result is similar to that of 2015, this would be considered as a Tories failure and hamper negotiations regarding Brexit. This would also be a negative signal for the GBP.

Oil is increasing and dollar is weakening

This Thursday, the official meeting of the OPEC countries will be held. The likelihood that the period of oil production limit will be extended until the end of the first quarter of 2018 is fairly large. It’s also likely that the other oil producers will join this agreement. However, this most likely won’t have a significant impact on the oil market.

Brent prices are beginning to return to their level from the beginning of this year. Currently, they are at the level of approximately 54 dollars. This is approximately 15% more than May’s minimum. Nevertheless, taking into consideration that US production has not been significantly increasing, it seems fairly unlikely that oil prices would go above 60 dollars per barrel.

Higher oil prices mean decreasing chances for lower inflation. This is negative news for the American currency. The EUR/USD remains near 1.12. The recent increase in the profitability of the US bonds was too insufficient to generate strong growths on the dollar. The general sentiment towards the USD has been negative as well. This was mainly caused by the actual implementation of the reform announced during the campaign. The weakness of the dollar remains the base case scenario.

PLN has been stable

There hasn’t been much going on with the zloty. The Polish currency has been benefiting from positive sentiment towards the EM currencies. Moreover, an increase in local consumption will most likely sustain the perspective for fairly positive GDP readings. This should also change the MPC attitude to slightly more hawkish.

The greatest danger for the zloty is the potential long-term sentiment deterioration in the global share market. This would cause a very intense wear-off of the zloty, especially taking into consideration the recent gains of EM currencies. Nevertheless, the chances for this to happen are minor and the zloty will most likely remain relatively strong.