Pound's sharp depreciation (Daily analysis 17.12.2019)

It hasn' t even been a week since the election and the risk of hard Brexit is back. Boris Johnson wants to prevent prolongation of the process of exiting the EU beyond the end of 2020, but negotiating a new trade agreement at that time can be extremely difficult. The pound losses the entire profit earned after the announcement of the election results in Great Britain.

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

• 2:30 p.m.: Industrial production in the USA in November (estimates:+0.8% month-on-month).

Boris Johnson's declaration suggests that 2020 will be a harsh year for the pound

In the morning, the British currency was under considerable supply pressure. At that time, Boris Johnson, the British Prime Minister, announced that a change in the law would ensure that the duration of the Brexit process would not be extended. The current trade agreement with the European Union expires at the end of next year. Johnson would like to conclude a new agreement by the end of this period. In fact, a new risk of hard Brexit is emerging, this time without a trade agreement. It would have to be concluded in 11 months, while the EU's negotiations with Canada, took nearly seven years.

The risk of hard Brexit was potentially eliminated by the election result with the Conservative Party winning with higher than expected outcome. Now the return of the risk factor causes supply pressure on the pound. Even before midday, the British currency's quotations in relation to the dollar withdrew the entire increase observed after the announcement of the election results. The GBP/USD exchange rate dropped to about 1.3156. The trade agreement issue always seemed problematic, and its implementation by the end of 2020 was doubtful. However, market participants could not expect that the risk of Brexit without the agreement would return so quickly. It also suggests that another year may be as difficult for the British currency as the current one. However, the trend for the pound in the following months should be positive, given that Boris Johnson plans to finalise the Brexit by the end of January 2020.

Today, the euro is supported by trade balance data. These are generally not the most relevant market data for the single currency, but they may increase hopes for a quicker recovery from the economic downturn. According to Eurostat, the trade balance (seasonally adjusted) rose to 24.5 billion EUR in October, i.e. 4.5 billion above expectations and 7.2 billion above September's level. It is also the highest level since September 2017. The euro/dollar exchange rate is currently in a limited fluctuation range (it is likely to remain so until the end of the year) but around midday, the EUR/USD exchange rate rose to its highs in the day, slightly above 1.1160.

Pound below in red

The zloty remains in good condition, which is fostered by the weakening of the dollar in recent weeks. The EUR/PLN exchange rate has again fallen below 4.26 today, moving around its lowest level since July this year. The Polish currency is also supported by data from the economy, which were published yesterday. They indicate a higher than expected inflation and a higher current account surplus. The most significant changes were related to the GBP/PLN exchange rate, which fell to 5.03. Meanwhile, after the announcement of the election results in the Isles, its exchange rate rose above 5.18 PLN. Today's over 1% drop in the pound against the zloty also meant the lowest level in nearly two weeks.

In the afternoon, data on industrial production in the USA will be published, and if they do not show a much stronger than expected growth (currently the consensus is 0.8% month-on-month) of monthly production, the dollar's quotations should be relatively stable, which will help maintain the good condition of the zloty.