Pound gets stronger (Afternoon analysis 01.10.2018)

Is the Brexit agreement with the EU any closer? New reports suggest that the UK government will agree to border controls. As a result, the pound has risen sharply, but in the context of the past few days, it has been limited for the time being.

Fewer chances for a "hard" Brexit?

The news of today was Bloomberg reports that Prime Minister Theresa May could make a new EU offer on Brexit, which could break the deadlock in negotiations that has been going on for many months. According to an anonymous government representative, the new offer includes an agreement to control goods, at least in part, at the border between the main British island and Northern Ireland.

If this offer is presented, the risk of a 'hard' Brexit (without an agreement with the EU) would fall significantly. This would be positive news for both the British economy (faster stabilisation of trading conditions for businesses) and its currency. The pound clearly appreciated after these Bloomberg reports. However, there is still a long way to go from media information to the actual submission of an offer.

History has shown that such information should be treated with little reserve until it is officially confirmed, especially in the case of such heated negotiations. Until then, we can even expect the pound to weaken again if the market does not actually see it. Today's growth, although sharp, has not been strong. GBP/USD quotations barely exceeded 1.31, although last week they were still above 1.32. As a result, the GBP/PLN pair has also risen to nearly 4.83 and seems unlikely to increase significantly and exceed 4.85 without official confirmation of these reports from the UK Government.

The PMI data of the British industrial sector was a positive surprise today. In September, the index rose to 53.8 points, although the median of market expectations was 1.2 points lower. It was also 0.8 pts above August's level, which was also revised upward by 0.2 pts. The end of Q3 turned out to be positive for this sector, which recorded the fastest growth rate in four months.

Although data was good in general, internal demand has strengthened and business confidence has risen to its highest level in three months, the condition of the UK's industrial sector is not very optimistic. In a commentary to the report, Rob Dobson, director of PMI's IHS Markit, pointed out that "although total exports increased, exports of goods used by foreign companies for further production fell for the third consecutive month, ending the worst quarter in over three years for this type of producers".

Tomorrow's preview

At 10:30 a.m., the PMI of the British construction sector will be published for September. After a positive surprise in the form of a better than expected PMI of the industry (53.8 points against a consensus of 52.6 points), this is unlikely to be the case for the construction industry. Excluding data for July (55.8 points), the PMI of this sector ranged from 52.5 to 52.9 points. The median of market expectations indicates 52.8 points, 0.1 points below the August level. The potential impact on the pound will be limited, particularly in the context of Brexit and the problems of both the internal and external cabinet of Prime Minister Theresa May.

Half an hour later, Eurostat will present data on producer inflation (PPI) in the eurozone for August. This is rather secondary data in terms of its impact on euro quotations (much more important is consumer inflation), but in the context of recent market signals, it may affect the euro valuation. The euro was appreciating a week ago after the ECB's head Mario Draghi commented that inflation had risen sharply. This statement was later mitigated by the ECB's chief economist, and the inflation in the eurozone published on Friday did not come as a positive surprise. The market consensus points to a marginal fall in the PPI ratio from 4.0% to 3.9% in annual terms. Taking into account the path of interest rate increases in the USA, a drop in PPI below the consensus by more than 0.2 percentage points may have a negative impact on the euro, although changes in the quotations for this publication alone will be rather limited.