Failure in Brexit talks (Daily analysis 15.10.2018)

The pound is depreciating due to the failure of the weekend negotiations. The chances for signing the agreement in mid-November is decreasing and the risk of a hard Brexit is growing. The zloty is stable and supported by reports on Poland's rating and inflation.

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

• 2:00 p.m.: Poland's currency account for August (estimates: -396 billion EUR).
• 2:30 p.m.: Retail sales in the USA in September (estimates: +0.7%, core index +0.4% m/m).

EUR/USD close to 1.16

The most important piece of news in the morning was the failure of the UK-EU weekend talks. Both sides hoped for an agreement on the most important issue - what to do with the Irish border. They also wanted a strong declaration of progress at the summit in Brussels starting on Wednesday. This would have resulted in the signing of the agreement around mid-November. Today, the date seems increasingly unrealistic given that all talks between the parties have been halted.

Greater uncertainty and the chances of a hard Brexit have resulted in a weaker pound today. However, the depreciation was not as significant as could be expected from such information. It was partly helped by the weakened dollar due to increased tensions between the US and Saudi Arabia after the famous case of the disappearance of a journalist who was criticised the Saudi Arabian government.

The EUR/USD quotations moved to the 1.16 boundary just before midday and the GBP/USD pair rose to Friday's closing level of 1.315. However, the British currency is likely to stay under pressure. It is hard to imagine that fears of Brexit will disappear. Pressure will also increase on the British Prime Minister Theresa May, which can only harm the pound in the coming weeks if we do not see a breakthrough in the negotiations.

The weaker dollar's condition, although to a greater extent due to short-term political effects rather than economic reasons, helped to maintain a relatively good valuation of the zloty in relation to the basic currencies. The Polish currency may also be supported by information on raising Poland's rating by the S&P Global Rating agency and slightly higher than expected inflation in September (1.9% versus consensus 1.8% y/y).

Although these are positive signals, external factors will play the greatest role in the zloty's valuation. The dollar's return to the upward trend will weaken the whole zloty basket, but taking into account its recent high resilience, the risk of a deeper depreciation is currently limited, and the prospect of 4.35 PLN per euro or 5 PLN per pound has been postponed in time.