Pound driven by strong fluctuations (Daily analysis 10.07.2018)

Great Britain is still absorbed by resignations which took place in Prime Minister May's government. The pound pared some of yesterday's losses, but the surprisingly weak production data has depreciated the sterling. The zloty depreciated and gave away a part of Monday's growths. The EUR/PLN pair close to 4.33-4.34 boundary.

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.

Brexit related problems

In the recent hours, the market attention was focused on the reports from Great Britain. Sunday's resignation of David Davis, Secretary of State for Exiting the European Union, has evoked mixed feelings in the market. On the one hand, the departure of the hard Brexit supporter from the EU is an opportunity to maintain close relations with the Union, but on the other hand, it is a major problem for Prime Minister May's government. Both elements were withstanding each other by yesterday afternoon.

There was a more pronounced reaction when Boris Johnson also resigned. The colourful British politician who is known of his sharp tongue and Head of Foreign Affairs resigned because of the Conservatives' adoption of a plan in which Great Britain has a quite close relationship with the EU and because of their failure to fulfil their referendum commitments from two years ago.

The pound depreciated by around a percent and it was not related with the resignation of another Brexit supporter, but because of the instability of the current administration and the risk that the head of government will be dismissed by more radical party members. This could also lead to the next elections, the outcome of which is largely unknown (surveys do not indicate a clear winner). Nor does the radicalising labourist alternative seem to be particularly beneficial to the pound and the British economy. More problems in the country also reduced the chance of interest rates increase by the Bank of England in August.

In addition, the pound was not supported by May's data on industrial production. The data was weak both compared to consensus and objectively. Production declined for the second month in a row, and in year-on-year relation, it increased by only 0.8%. Only the manufacturing production (an increase of 1.1% year-on-year with a consensus of 1.8% year-on-year) looks slightly better. Weak production data increases the risk of the Bank of England postponing the interest rate increase at its next meeting, which has a negative impact on GBP.

Weak Zew index, depreciation of the lira and correction on the zloty

Macroeconomic data also was not above expectations and slightly failed in Europe. Economists surveyed by the ZEW Institute have been the most pessimistic about the economic situation in Germany for 6 years. Probably this resulted in the drop in the EUR/USD pair below the 1.1700 boundary in the early afternoon.

On the other hand, information from Turkey may have had a negative impact on emerging markets, including the zloty. President Erdogan appointed his son-in-law as the combined Minister for Finance and Treasure. The Turkish lira depreciated by 4% in a few hours and we are again the USD/TRY is approaching the upper limit of the volatility range of the last weeks. It is also worth remembering that as late as in March, the dollar cost 3.8 TRY, and now the dollar costs over 4.7 TRY. For 4 months, the US currency expressed in lire has become more expensive by 30%.

Definitely worse situation than yesterday is also observed on the zloty, although the Polish currency is far from the variability of the lira. Today, the EUR/PLN exchange rate reached approx. 4.34 after yesterday's strong falls and the start of Tuesday's quotations of approx. 4.31. The zloty rebounded from yesterday's excessively strong growths, and secondly, data from Germany or fears of Turkey also do not support the Polish currency. It should also be remembered that the issue of global foreign trade is not heading in the right direction, which is also a burden for the zloty.