Pound's depreciation (Afternoon analysis 10.12.2018)

Brexit reports dominated today's currency market quotations. The British currency has been under significant supply pressure today - its exchange rate against the dollar fell to its lowest level in 1.5 years, and the zloty since the end of August this year.

GBP/USD close to 1.26 handle

Brexit vote has been in the limelight of the British Parliament in recent weeks. However, Bloomberg announced today, citing anonymous sources, that there would be no vote. This clearly weakened the pound, and data from the British economy did not help it either today, which showed a stronger than expected fall in industrial production and an increase in the foreign trade deficit.

As a result, today's prices of the pound fell in relation to the dollar to the lowest level in 1.5 years, to around 1.2607 after 3:00 p.m. The cancellation of the vote most probably means that Prime Minister May's defeat in Parliament would be substantial. This could put strong pressure on the pound. On the other hand, it is important to bear in mind how volatile the pound has been recently and how strongly it reacts to media reports. Such fluctuations are expected in the short term, especially if there are statements that increase the probability of a mild Brexit and closer relations with the EU.

The European Commission is prepared for all scenarios, once the European Supreme Court has ruled that the United Kingdom may revoke the invocation of Article 50, i.e. de facto undo Brexit. At the moment, however, poor data from the Isles, combined with no vote, should keep the pound in weak shape.

The zloty basket was relatively stable today, excluding, of course, the quotations of the pound to the zloty. The GBP/PLN exchange rate fell around 4.7450 today, to its lowest level since the end of August this year. It is this currency pair that will be subject to the greatest fluctuations in the coming hours and days. Currently one of the scenarios of a chaotic Brexit may, in theory, be that the GBP/PLN exchange rate will even fall below 4.00.

Tomorrow's preview

At 10:30 a.m., the Office for National Statistics (ONS) will publish data on changes in the average wage of the British people. Market consensus (including bonuses) shows an annual increase of 3.0%. Due to the significant impact of wages on inflation, this publication was most likely to cause an increase in the pound's volatility. This time the fluctuation range may also increase around the publication, but the final impact on the British currency may be limited. Its quotations are currently the most responsive to official or unofficial reports on Brexit, in particular, the vote on its plan in the British Parliament.

At 11:00 a.m., the German ZEW Institute will present the economic sentiment index for Germany and the eurozone in December. In both cases, a decrease is expected (to -25.0 and -23.2 points respectively). The sentiment can to a large extent be seen in the current share valuations and main equity indexes of both regions, which are currently at 2-year lows. The impact of the data on the euro seems to depend to a large extent on market sentiment. With strong increases in the main market indexes tomorrow, the data may be practically ignored, especially as the market may already be shifting its attention to the meeting of the European Central Bank.