Crucial days for Great Britain and pound (Daily analysis 11.03.2019)

The market stabilises after last week's ECB meeting and weaker than consensus readings from the US. Germany's GDP growth rate may be lower than 1% this year. Brexit is in the limelight in the coming days. The zloty is stable in relation to the main currencies. The euro remains close to the 4.30 PLN boundary.

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

• A lack of macro data may noticeably impact the analyzed currency pairs.

Stabilisation

Last week was full of crucial events. On the one hand, there was a strong negative signal for the euro from the ECB and, on the other hand, a surprisingly low increase in payrolls in the USA (20,000 with an expectation of 180,000). We believe that in the case of new payrolls in the non-farm sector is rather the result of a small research sample (ADP has three times the sample size, and therefore the readings of this private organisation are less surprising than those of the Department of Labour). In general, the low reading in February, as well as the very high reading in January, are primarily due to statistical rather than economic issues. So far, there is no indication that the trend in the creation of about 150-200 thousand payrolls in the USA has collapsed rapidly.

However, what should be emphasised is that the Fed relies on available data, therefore the evaluation of the labour market may deteriorate slightly. This could also be an explanation to some members to revise their forecasts for future interest rates in March's FOMC estimates downward (meeting next week). To some extent, this has an impact on the dollar, but more towards stabilisation rather than the beginning of a weakening trend in the US currency. Currently, the level of around 1,1250 seems to reflect the risk balance for the main currency pair well.

This risk balance is also not altered by today's weak data from Germany. Production fell by 3.3% year-on-year in January, and the monthly decline was minus 0.8%, but after the order data from Friday, this is not a particular surprise. Also, the Handelsblatt reports quoted by Bloomberg on the possibility of a downward revision of German GDP estimates to 0.8% for 2019 do not seem to be surprising either (similar estimates have recently been published, among others, by the OECD). Generally, these reports are already included in prices and are unlikely to trigger another downward trend in the euro.

Great Britain in the spotlight

The next three days (from Tuesday to Thursday) will be important for the British people. On Tuesday, the Brexit plan will probably be lost once again in the House of Commons. Prime Minister Theresa May has not negotiated any major concessions from Brussels, so another failure is practically a foregone conclusion.

On Wednesday, will take place the next vote. This time concerning whether the United Kingdom should leave the Union in a disorderly manner. This idea will also be rejected, and we will proceed to the vote on Thursday when parliamentarians decide to extend Article 50, i.e. to remain in the Community. From now on, things seem to be less obvious, and many questions arise.

How long would this extension last? It should end before the first meeting of the new EP, i.e. at the beginning of the second half of this year. Will the extension change anything if several months have passed and the British have not managed to reach an agreement on key points in the plans of the Brexit? So it is possible that this extended period may be troublesome for British politics. The concept of new parliamentary elections is quite real. This generates new political risks, both those which may eventually end up positive for the pound (e.g. another referendum, very close relations with the EU - negotiations towards the Norwegian option), and negatively - through growing support for Eurosceptics hindering all mild concepts of ties with the EU. A chaotic Brexit is not particularly likely now, but a quick agreement is also no longer certain. This may maintain pressure on the British currency.

Stable zloty

Few interesting events occurred on the zloty. The EUR/PLN exchange rate remains around 4.30 PLN, and it is unlikely that there will be any significant deviations. The upcoming vote on the Brexit will probably not be so important and will not cause a global increase in risk aversion, so the whole basket of the zloty should not depend on information coming from the British Islands.

Not much new, compared to Wednesday's MPC press conference, was discovered during the presentation of the Inflation Report. The higher inflation next year (2.7%) is mainly due to the partial energy price release after the government has frozen them this year. The investments projected for 2020-2021 (a decrease in the growth pace to 3.7% and 2.6%, respectively) also look weak, but this could also have been expected, taking into account the worse economic situation and lower contribution of local government spending. In general, the projection is rather neutral for PLN.