Pound close to 34-year-old lows (Daily analysis 3.09.2019)

The euro depreciates further against the franc and the dollar, reaching in both cases more than two-year lows. The pound may close today's session at the lowest level in 34 years in relation to the dollar. The zloty gives up part of yesterday's increases and is quoted at 4.00 PLN for the dollar.

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

• 4:00 p.m.: ISM index of the US industry (estimates: 51.2 points).

Dollar and franc appreciate

Tuesday's first trading hours on the global market are similar to those seen on Monday. Fear of the escalation of the trade war (new tariffs came into force, no specific date set for the resumption of talks by the negotiating teams from China and the USA) leads to a deepening of the EUR/USD depreciation and a decline in the main currency pair below the 1.0950 boundary (the lowest level since April 2017).

The second currency pair, which well shows the weak condition of the eurozone and the inflow of capital to safe havens, is the EUR/CHF. The franc in relation to the euro is the strongest since mid-2017, and the pair is quoted for less than 1.0850 at around midday (CET time).

Apart from the eurozone's economic weakness and the expected return to quantitative easing by the ECB, the situation in the UK also has a negative impact on the euro and a positive impact on the franc or the dollar. The situation in the Islands has become so complicated that it is difficult to find a positive solution to the political and economic impasse, while many factors could further worsen the UK's economic prospects. This also caused the GBP/USD to fall below the 1.20 boundary. If this level were maintained until the end of the day, the pound would close the session with the lowest value against the dollar in 34 years (since May 1985).

Every scenario may harm the pound

The pound's weakness is the result of an accumulation of several factors. The controversial approach of Prime Minister Boris Johnson towards Brussels (reluctance to extend the negotiation period; refusal to accept an earlier agreement) increases the risk of non-contractual leaving the EU.

Ironically, more pro-European conservative members who oppose Johnson and want to extend the period of negotiations do not help the pound either, because their behaviour could lead to early elections. This could happen on October 14th (shortly after the 5-week suspension of the House of Commons), half a month before the planned exit from the EU (October 31st). If the composition of the future conservative government were radical, then leaving without an agreement would become the base scenario, which would probably dramatically depreciate the pound. And what if the Labourists won?

A victory of Jeremy Corbyn's party could prevent chaotic exit from the EU, but his economic plans may seriously damage the United Kingdom. This is not just about increasing the deficit and a more social approach. Corbyn is planning a real economic revolution (broadly described in the Financial Times' analysis "The Corbyn Revolution"). It is intended to involve, among others, broad nationalisation of public utility companies, significantly higher taxes for the most highly paid or forced transfer of company shares to their employees. The Financial Times also writes that this may be only the beginning, as leaders work on a 4-day working week, restrictions on the highest salaries or guaranteed income. Given that the UK has been losing competitiveness for years (a persistent current account deficit), such a policy would probably further worsen the situation of the pound, even with a less controversial approach to Brussels.

The next few hours will be very important for the pound. Is it possible to prevent early elections? If the radical forces decided to negotiate with Brussels, then the pound could be expected to be strengthened. But it is more likely that Johnson will not withdraw from yesterday's announcement that the exit from the EU will take place on October 31st and that in the event of growing internal opposition and a desire to block the hard Brexit by the parliament, he will decide to go down the road of early elections. This should maintain downward pressure on the pound.

The zloty gives away yesterday's increases

The Polish currency loses its value. The franc, the dollar and the euro are more expensive than they were yesterday afternoon. This is not a panic sale of PLN and is rather a result of the global situation (trade war, fears about the eurozone condition, Brexit problems). In general, however, the last 24 hours have shown that for the time being the potential for the zloty strengthening is limited and the range of 4.35-4.40 on the EUR/PLN exchange rate remains the core one. Also, the strength of the franc or the dollar in relation to the Polish currency is likely to be maintained in the next few days due to the generally high level of global risk aversion in the market.