Pound pares some losses (Afternoon analysis 13.11.2018)

The volatility of the British currency persists. There is a chance for a close agreement with the EU which supports the British currency in the afternoon. The 5.00 boundary is within GBP/PLN range again, which rose to 4.95 today.

USD still quite strong

The dollar remains relatively strong, although appreciation pressures weakened slightly since the beginning of today's session. The EUR/USD quotations fell to around 1.1220 during the Asian session and then before midday, during the European session. Since then, however, a gradual weakening of the dollar has been observed. The exchange rate of the main currency pair approached 1.1270 at 3:00 p.m.

The reversal of some losses by EUR/USD was mainly the result of an improvement in global sentiment. This was the result of slightly more optimism about trade negotiations between the US and China, as well as an increase in the pound's value. Media reports (e.g. Bloomberg) indicate that negotiations with the EU on Brexit are progressing well, and Liam Fox (British Minister of International Trade) said that both parties are potentially very close to concluding an agreement and that patience is needed.

This clearly increased the pound's valuation, which in the afternoon rose to nearly 1,30 USD, although it was still below 1,29 in the morning. There were many sudden returns in the Brexit negotiations, but if this time the announcements are confirmed and positive information on the agreement starts to flow, the pound can significantly appreciate and exceed the last GBP/USD highs (about 1.318).

In that case, the GBP/PLN pair would most likely exceed the 5.00 level, considering how close it is (today the exchange rate rose to 4.95). On the other hand, the prospects for the increase in the zloty basket are limited. The slight chances for interest rate increases in Poland over the next two years, the stronger than expected economic slowdown in the eurozone and the prevailing relatively weak data from the Polish economy suggest a path of a gradual downward trend in the zloty.

Tomorrow's preview

At 8:00 a.m. Destatis will present preliminary data on Germany's GDP growth pace in Q3. The median of market expectations indicates that the German economy grew at an annual pace of 1.3% over this period, which would have been a decline in the pace of the previous quarter (2.3), although mainly due to the high base of the previous year (2.2). The euro is currently under considerable pressure from the appreciating dollar. Worse than expected market data (especially by more than 0.1 percentage points) may exert additional downward pressure on the euro.

This would most probably not be positive for the zloty either, given that Germany is Poland's main trading partner. However, the zloty will also be affected by the publication of the Polish Central Statistical Office (GUS) at 10:00 a.m., which will publish preliminary data on Poland's GDP growth pace in the third quarter. The market consensus assumes that the GDP grew by 4.7% annually (compared to 5.2% in the previous quarter). Likewise, the Polish currency is weakened, not only due to the strong dollar but also because macroeconomic data is worse than expected (e.g. industrial production, retail sales, inflation). The stronger than expected weakening of Poland's GDP growth pace may weaken the zloty basket, especially if the dollar strengthens.

At 10:30 a.m., the Office for National Statistics (ONS) will publish data on consumer inflation (CPI) in the UK in October. Market consensus indicates that core inflation (excluding energy and food prices) remains at the same level as a month earlier, i.e. 1.9% y/y. Taking into account the recent significant volatility of the pound caused by Brexit reports, we can expect an increase in investor activity around the publication time, especially if the data deviates from the consensus. However, even within a few days, negotiations between the EU and the UK on Brexit will have the greatest impact on the pound.

At 2:30 p.m., the Bureau of Economic Analysis (BEA) will present analogous data for the US economy. The median of market expectations assumes the reading of core inflation at the level of 2.2% y/y, similarly as in September. Also, in this case, deviating from the consensus, given the current market situation, may contribute to a significant change in the dollar, and indirectly affect most of the currency market.