Pound appreciates but Brexit will put pressure on it (Afternoon analysis 9.09.2019)

The beginning of the new week's trading has been without a revolution so far. After positive data from the UK and Johnson's statements, the pound rebounded. Mnuchin suggests a cut in interest rates next year in the USA. The Swiss franc under pressure. The CHF/PLN was at the lowest level in a month.

Only ECB

Monday was not a day of fundamental changes on the currency market. In addition, they should not be expected before Thursday's statement and the press conference of the European Central Bank, which is a key event scheduled for this week. The pound caught a little wind under its wing after industrial production, and GDP data exceeded expectations, and shortly afterwards, Boris Johnson at a conference with the Irish Prime Minister expressed himself in a more compromising tone that it could have been expected.

In the first part of the day, the price of the "cable", i.e. the GBP/USD pair, depreciated in comparison to the Friday closing and was around 1.2234. After a wave of positive impulses, its quotations rose to 1.2384 in the afternoon - the highest price in a month and a half. The GBP/PLN exchange rate rose just above the 4.87 boundary, which is the highest level since the end of May this year. However, it should not be expected that this is the beginning of increased demand for the pound and its significant appreciation. Significant day-to-day fluctuations are now included in the pound’s trading, and Brexit issues, if we ignore individual "headlines", should maintain supply pressure in the coming weeks.

In the afternoon, Bloomberg quoted the US Treasury Secretary Steve Mnuchin, who said that Trump's administration would consider cutting taxes next year. Moreover, he added that there was no reason to believe that Jerome Powell's position as president of the Federal Reserve could be threatened (President Trump often criticized Powell for too restrictive monetary policy). This is no breakthrough information, although in a broader context it is rather positive for the dollar and the US equity market. However, as expected, the market awaits Thursday's ECB, and around this event we can expect very large fluctuations in the currency market this week.

The main currency pair, the EUR/USD, recorded only slight changes until 4:00 p.m., increasing by about 0.2% to 1.1050. Therefore, the EUR/PLN exchange rate was relatively stable and oscillated around Friday's close, i.e. about 4.3350, while the dollar's exchange rate decreased to about 3.92. The Swiss franc, which has been losing its value vs. almost every other currency, also decreased the CHF/PLN exchange rate to the lowest value since the month, i.e. slightly below 3.96 level.

Tomorrow's preview

During the Asian trading hours, data on consumer (CPI) and producer (PPI) inflation in China for August will be published. These are not the most important data concerning the Chinese economy (the most important are those regarding GDP and industrial production), but a significant deviation from what the market expects may have some impact on market sentiment in the early hours of European trading. The market consensus points to a drop in CPI inflation by 0.1 percentage points to 2.7% per year and an increase in the PPI decline to -0.9%.

In the morning, the data on industrial production from France and Italy will be announced. They will concern July, so the data will be somewhat old. The data will probably not have a more significant role to play in terms of the impact on the euro quotations, especially as this week's focus is shifting towards the European Central Bank meeting on Thursday. Concerns about the eurozone economy mean that once again negative readings (on a yearly basis) may weaken the euro slightly and worsen market sentiment. The median of market expectations suggests an increase of 0.5% year-on-year in industrial production in France and 0.3% in Italy.

At 10:30 a.m., the Office of National Statistics (ONS) will publish data from the British labour market. The average monthly wage (including bonuses) is expected to maintain a high growth pace of 3.7% year-on-year in July, while the unemployment rate at 3.9% and the claimant count is expected to remain at around 30k in August. The pound appreciated after today's higher-than-expected industrial production and GDP data and Boris Johnson's assurances that he wants to reach a Brexit agreement and that he will not allow border controls on the Irish border. Reports on Brexit have the greatest impact on pound quotations, although another portion of better than expected data from the British economy may further strengthen the pound - at least in the context of the day.