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Market awaits Thursday (Daily analysis 9.09.2019)

9 Sept 2019 13:08|Marcin Lipka

The pound is supported by Johnson's assurances about no border on the Irish island. The dollar is insensitive to Friday's speech by Fed President Jerome Powell. The ECB meeting could trigger strong currency movements due to the abundance of hypothetical impulses. The zloty is stable. The euro is below 4.35 PLN.

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.

A few calming words from Boris Johnson

Johnson's strong conflict with parliament and opposition within the Conservative Party suggested that today's meeting with the Irish Prime Minister would also be rich in assurances that Great Britain would leave the EU quickly as well as questioning the backstop.

Boris Johnson was relatively agreeable in his statements during the press conference. He said, first of all, that he would never allow border controls to be introduced on an Irish island and he believed that he "strongly prefers to find an agreement" in the context of an orderly exit from the EU. This helped the pound in the first part of the day, and the GBP/USD pair moved to around 1.2350, while the pound in relation to the zloty cost approx. 4.85.

On the other hand, it is worth noting that Johnson's firm approach in terms of executing Brexit brings an increase in support (Tory's polling ratings are about 10 percentage points above the labourists' score). It is unlikely that he would give up the fight for leaving the EU at the end of October this year, even if it would expose Great Britain to the risk of non-contractual leaving the EU. A negative change in sentiment on the pound may, therefore, be sudden, especially if Johnson's team were able to withdraw the law extending the UK's EU membership in the absence of a new agreement with Brussels.

Fed and ECB

Friday's speech by Jerome Powell (or rather a series of questions and answers to the head of the Federal Reserve and his Swiss SNB counterpart Thomas Jordan) did not provide any clues in the context of next week's Federal Reserve meeting and how far interest rate cuts will go in the current monetary easing cycle.

However, before FOMC's decision, there will be a much more significant event on Thursday. The ECB meeting is an event that can make major changes to monetary policy in the single currency area.

There is a growing probability that European monetary authorities will decide to cut the deposit rate (from the current minus 0.4% to 0.5% or even to 0.6%). Returning to the purchase of assets from the market (mainly treasury bonds, raising the limit of assets in the portfolio of the central bank) is also possible. The ECB could buy instruments worth around 30 - 40 billion EUR on a monthly basis over the next year in order to stimulate the economic situation and support inflation.

In addition, the ECB may decide to go with new forward guidance, i.e. a promise, e.g. that the underlying monetary policy parameters will remain unchanged until inflation (as the ECB's mandate) does not approach the level close to, but below, 2 %. The introduction of this 'three-pack' would probably significantly reduce the euro in relation to the main currencies and cause a marked decline in the EUR/USD. Also, the EUR/PLN pair would probably depreciate significantly, although other main currencies (dollar, franc) would probably become stronger in relation to the PLN. On the other hand, in the absence of specific ECB decisions (rather unlikely, given the scale of expectations built up in recent weeks), the euro could increase strongly (also to the zloty), and the EUR/PLN pair could even test 4.40.

Calm trading on the zloty

The situation on the Polish currency is relatively calm during the midday trading phase. Movements on EUR/PLN or USD/PLN pairs are limited. Investors are probably waiting for the second part of the week, especially for the ECB meeting.

The zloty is insensitive to the electoral promises of the ruling coalition or opposition. The permanent introduction of 13th and 14th pensions (one can rather forget about the balanced budget), taking into account the ageing population and the naturally growing expenses of FUS (Social Insurance Fund), is not an optimal solution for the long-term development of the country. Too strong growth of the minimum wage in relation to productivity does not seem to be a desirable solution either. Overall, the prospect of these developments from a currency market point of view is too distant to respond with more pronounced movements. We can say that at the moment and according to the announced scale, the election promises will rather be ignored by the zloty.

9 Sept 2019 13:08|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

6 Sept 2019 13:40

Data from the USA with limited impact? (Daily analysis 6.09.2019)

5 Sept 2019 17:13

Set of positive data from the USA (Afternoon analysis 5.09.2019)

5 Sept 2019 13:39

Mixed signals from markets. Pound appreciates (Daily analysis 5.09.2019)

4 Sept 2019 17:21

Another turn on the Brexit issue? (Afternoon analysis 4.09.2019)

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