Great volatility on the British currency (Daily analysis 12.03.2019)

12.03.2019 13:14|Marcin Lipka

The strong movements in the pound over the last few hours are the result of new agreements between Prime Minister Theresa May and Head of the European Commission Jean-Claude Juncker and the absence of a change of opinion on the backstop by the General Attorney. US inflation should not significantly disrupt the dollar's exchange rate. The zloty remains stable, but today we expect significant changes in the quotations of the British currency in relation to the Polish one.

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

  • 1:30 p.m.: CPI inflation data from the USA (estimates: 0.2% month-on-month and 1.6% year-on-year, excluding fuels and food 0.2% month-on-month and 2.2% year-on-year).
  • 8:00 p.m.: Vote on Brexit in the British House of Commons. Whole afternoon and evening reports on the chances of Parliament supporting Prime Minister May's plan.

Unexpected visit and political failure

Prime Minister Theresa May, during a few hours' night visit to Strasbourg, tried to reach a new EU agreement on the Brexit. Above all, the aim was to formulate a backstop mechanism in such a way that, in the absence of a new trade agreement, the UK would not be legally bound to the EU by a customs union.

The results of the negotiations or the statements made this morning by key politicians suggested that changes in the backstop could somehow convince the Eurosceptic Tory to support the current Brexit plan. However, these hopes were killed by the opinion of General Attorney Geoffrey Cox, who stated that "legal risks remain unchanged" in the context of the backstop.

In such a scenario, it seems very unlikely that the Eurosceptic Tory members (there are several dozen of them) would support a modified agreement. So we return to the starting point, which assumes that during the vote (about 8:00 p.m. CET) the Theresa May plan will be rejected. In addition to the conservative party, it is likely that virtually the entire opposition will also oppose the agreement with the EU, as the Labour, Scottish SNP and Liberals have their own ideas for a Brexit.

At the time of publication of the General Attorney's opinion, the pound practically discounted the defeat of May during the evening's vote. In the morning, the GBP/USD exchange rate was between 1.3200 and 1.3250, and in the early afternoon, it moved down to the 1.3000. This is a very significant change, which further reversed all of yesterday's increases when investors were buying the pound in the hope that a visit to Strasbourg would really change the fundamental backstop issues.

There is also a plan from the beginning of the week when the baseline scenario was the rejection of the May plan on Tuesday and then the rejection of the non-contractual Brexit the next day (i.e. Wednesday). Instead, Thursday's vote is complicated because the extension of the negotiations (the vote on the extension of Article 50 and Britain's actual staying longer in the Union) is a bit pointless since the trip to Strasbourg fails. Therefore, opinions on the need to hold new elections in the British Islands may very quickly emerge, as the political resources of the current Prime Minister are running out. Overall, the prospects for the pound remain moderately pessimistic. The chaotic Brexit is unlikely, but the prolonged political uncertainty and lack of opportunity for a rapid agreement with the Union will make it difficult for the sterling to generate stronger growth.

No significant changes on the zloty

Compared to what is happening on the pound, the situation of the zloty is exceptionally calm. The EUR/PLN moves close to 4.30. The EUR/USD quotations after slight increases in the morning return to 1.1250, which also translates into a relatively stable dollar exchange rate against the zloty compared to yesterday's session.

Apart from Brexit issues, it is worth noting the afternoon CPI inflation data from the USA. The US wages, which have been growing the fastest in 10 years, may maintain or even slightly increase inflationary pressure across the ocean. If core inflation for January exceeds the consensus of 2.2% year-on-year, it may slightly support the dollar. However, apart from the Brexit and pound issues, there is little risk of more fundamental changes in the broader market.


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