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Pound under pressure (Afternoon analysis 2.09.2019)

2 Sept 2019 17:16|Marcin Lipka

The pound loses strongly after weak economic data and increased uncertainty about Brexit. Control of capital flows helps the Argentine peso. The zloty appreciates. The EUR/PLN is approaching 4.35 level.

Weak PMI and Brexit game

On the global market, similarly as before midday, a strong dollar is observed. Today, the EUR/USD exchange rate has set new, more than two-year lows. In turn, the control of capital flow introduced by Argentina allowed the peso to partly pare some losses with little liquidity and a 10% spread. However, the bond market (35 cents out of 1 euro is paid for instruments denominated in European currency with the maturity in 2028) and the general economic situation of the country - high inflation and deep recession - indicate huge problems that will bother the country for years to come. Regardless of the political division of power in October.

Today, investors' attention is also drawn to the situation in the United Kingdom. This morning Markit reported that the PMI for the industry in the UK fell to its lowest level in 7 years (47.4 points). According to the report, the overall index was negatively affected mainly by new orders and the pace of employment decline, which turned out to be one of the fastest in 6.5 years.

The UK economy, apart from global issues, is also adversely affected by Brexit. These concerns can be seen both in the Markit survey and, of course, in the current political discourse. Investors fear that misunderstandings within the conservative group ("rebels" want to block the possibility of a non-contractual Brexit) may lead to early elections when it turns out that Prime Minister Boris Johnson does not have enough support in the House of Commons to pursue an aggressive policy in relations with Brussels. However, this does not have to be particularly good news.

If the polls were to turn in favour of conservatives, this could create a parliamentary majority of representatives with views similar to those of the current Prime Minister, thus putting aside members of the Conservative Party who want to reach a compromise with Brussels.

The Labourists' plans are not entirely clear either. Apart from a milder approach to Brexit, the strategy has not been unified as to whether it would be worthwhile to seek a new referendum in the context of leaving the EU. Jeremy Corbyn's economic plan is also too social. Not only is it difficult for investors to keep up with what is happening in the Islands, but none of the solutions currently on the table seems to be optimal for the sterling. Today, the pound loses about 1% to the dollar, and the GBP/USD pair decreases again to around 1.20. In the case of the United States, the pound is about 1% lower to the dollar, and the GBP/USD is about 1.20% lower to the US currency.

Zloty's good behaviour

In the afternoon, the Polish currency was clearly appreciating. Slightly better than expected data on Polish industry published by Markit, and investors' attention focused on other more urgent topics (Brexit, Latin America, China) as well as lack of sessions in the USA (lower portfolio capital and more local transactions) allowed the zloty to pare some of the losses of the last 2-3 weeks. For the time being, it seems that global sentiment is too weak for the EUR/PLN exchange rate to fall below 4.35 and the USD/PLN exchange rate to move noticeably away from the 4.00 PLN boundary.

2 Sept 2019 17:16|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

2 Sept 2019 12:52

Record-high dollar (Daily analysis 2.09.2019)

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Zloty appreciates (Afternoon analysis 17.04.2019)

25 Mar 2019 13:56

Hope to come from Ifo (Daily analysis 25.03.2019)

22 Mar 2019 12:45

Dreadful data from Germany and France (Daily analysis 22.03.2019)

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