Pound appreciates but will it last for long? (Afternoon analysis 10.10.2018)

Minor changes in the euro valuation against the dollar, but these fluctuations could increase tomorrow. The British currency continues to gain and the GBP/USD pair is at its highest level in two weeks.

Mixed data from British Isles

Wednesday was not characterised by significant changes in the currency market. The euro is still under pressure from the Italy-European Commission budget conflict, although it has not lost its value today. For a week now it has been clear that the main currency pair's quotations oscillate around the 1.15 level and the lack of a clear impulse will not cause significant deviations from this level, although such fluctuations may occur tomorrow.

Since yesterday afternoon, the pound has also appreciated. The GBP/USD pair rose from around 1.30 to almost 1.32. This is the aftermath of media reports referring to anonymous sources which say that negotiations on the Northern Ireland-Ireland border and the UK's stay in the EU are going in the right direction. However, the situation regarding the conditions for leaving the EU has not changed, and the risk of a hard Brexit is still present.

The Office for National Statistics (ONS) incidentally published a set of macroeconomic data today. The UK developed at a rate of 0.7% between June and August compared to the previous three months. This is 0.1 percentage point above market expectations, but the August data also turned out to be 0.1 percentage point below consensus - the economy remained at the same level as in July.

Industrial production increased by 1.3% in August in comparison to the same month of 2017, i.e. by 0.3% more than the median of market expectations, which surprised positively. On the other hand, the construction sector recorded a weak month, growing only by 0.3% per year and the slowest growth pace since April this year. The international trade balance was also relatively weak, with a deficit of 11.2 billion GBP in August, 0.3 billion higher than expected and 1.2 billion GBP higher than in July.

Therefore, August's data was mixed, with a slightly negative outlook. However, the pound practically did not react to it, which shows that Brexit-related info, whether official or not, will be important for its valuation in the short term.

Looking at the pound versus the zloty quotations, the British currency increased by less than 3% in the last month and a half. This is a result of market expectations concerning the positive outcome of talks between Great Britain and the European Commission, but also the weakening of emerging countries' currencies due to the problem of the Italian budget. Although the limit of 5.00 PLN per GBP/PLN is quite close (today the exchange rate rose slightly above 4.93), it seems that maintaining the exchange rate above 5.00, in the long run, will require a favourable agreement with the European Commission. Taking into account current events, recent increases in the value of the pound may be somewhat exaggerated and we will observe their correction.

Tomorrow's preview

Thursday will be the most important day of the week when it comes to macroeconomic publications. At 1.30 p.m., the European Central Bank (ECB) will publish minutes from the last meeting in September. Given the recent rapid weakening of the euro and the problems related to Italy, the euro's quotation may be particularly sensitive to hawkish' signals from the ECB. However, it seems unlikely that such a discussion will take place (suggesting the possibility of raising interest rates earlier than in the second half of 2019).

If the minutes do not surprise you, market attention may quickly shift to the US consumer production index (CPI) in September, which the Bureau of Economic Analysis (BEA) will publish one hour after the ECB. The core inflation index, i.e. excluding energy and food prices, will be the most important part of this publication. In August, it fell unexpectedly by 0.2 percentage points to 2.2% per year. The median of market expectations is 2.3% and it seems that the slightest deviation of 0.1 percentage point may cause significant movements on the dollar and practically the whole currency market.