New highs reached by the pound (Daily analysis 26.02.2019)

The British currency reaches multi-year highs in relation to both the euro and the zloty. The risk of a chaotic Brexit is decreasing, which derives from the messages of the ruling coalition and opposition labourists. The pound clearly exceeds the 5.00 PLN limit, while EUR/PLN remains within the range of 4.33-4.34.

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.

Pound strongly appreciates

For a long time, we have been pointing out that the prospects for the pound are getting better despite the complicated political situation in the United Kingdom and the Brexit. The real risk of chaotic exit from the Union is fading. The events of the past hours are proof of this.

The pound has the highest value in relation to the euro in almost two years. One euro costs 0.86 GBP, while this year's euro cost 0.91 GBP, which is over 5% more. The increase in the pound since yesterday evening is based on two pieces of information. First of all, Prime Minister Theresa May will probably promise members of his government, and later parliamentarians, that she will not allow for a chaotic Brexit.

The second positive news was that Jeremy Corbyn, the leader of the Labour Party, agreed to a new referendum on UK membership in the European Union. Therefore, the whole political scene is shifting closer to the scenario of no chaotic Brexit, and perhaps future very close relations with the EU, or even no Brexit.

The Eurosceptic Tories remain a problem. They believe that chaotic leaving the Union will not cause major economic problems at all. In general, however, if they do not accept the conditions of the Prime Minister, they risk that the government will ally with the opposition and the exit from the Union will be postponed for another month.

Of course, not all elements related to Brexit are clarified. While there is support for rejecting a chaotic exit from the EU, there is no support in the House of Commons for a concrete plan. Negotiations with Brussels on backstop are also ongoing, but they do not bring any solutions. Therefore, there is still a risk of government collapse if the agreement is not voted through in March. There is also a risk of early elections, but given the limited number of orthodox Eurosceptics, the future House of Commons could be more open, for example, to very close relations with the EU (the Norwegian option plus the customs union, which practically simulates full participation in the community). A more serious discussion about returning to the concept of another referendum may also return (support from the labourists is already there).

The pound should still be a beneficiary of events in the UK, and further increases are not excluded, especially in a scenario where close relations with the EU are maintained, and the risk of a chaotic Brexit is decreasing.

Zloty's stabilisation

A slightly weaker dollar and relatively good global sentiment stabilise the zloty. In the context of fiscal changes this year, signals from government members suggest that there will be no amendments to the budget law this year (information from "Dziennik Gazeta Prawna" or statements by Joachim Brudzinski, head of the Ministry of Interior and Administration). It is difficult to say where a dozen or so billion zlotys will be found for additional expenses.

It is not excluded that the initiators of fiscal changes (extension of the Family 500+ child benefit program and the thirteenth pension) are counting on a clear acceleration of economic growth. In the statement published today by Professor Jerzy Zyzynski, a member of the Monetary Policy Council, we can find out that GDP this year will grow by 5.5%. It seems extremely unlikely, and even if it happened, it will probably coincide with a very clear increase in the current account deficit and a very high consumption base for the next year. Then, in turn, there would be a risk of very weak economic growth in 2020.

However, for the time being, the market will rather avoid nervous decisions. Earlier fiscal stimulation was also extensive as far as the deficit is concerned, and yet the excessive deficit procedure was successfully avoided. Probably, it is only when there are clear signs that the budget will be difficult to reach or when the monthly data on the economic situation will be weak, that there will be a more pronounced fear of the zloty's condition and its greater depreciation. Without these negative factors, the Polish currency, despite higher risks, is likely to remain relatively stable.