Sentiment improves. Zloty appreciates (Daily analysis 4.09.2019)

A series of global events improves sentiment on the broader market. Support for the pound can be temporary in the context of both a general increase in risk appetite and Brexit events. The zloty appreciates. The franc falls below 4.00 PLN.

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

• A lack of macro data may noticeably impact the analyzed currency pairs.

Weaker dollar and help from Hong Kong

In yesterday's analysis, we stressed that weaker macroeconomic data from the US (ISM index for industry below 50 points) have a negative impact on the US currency and increases the Fed's chances of cutting interest rates by more than 25 basis points at its September meeting.

In turn, this morning, we received a positive boost from Asia. Hong Kong authorities have decided to withdraw the controversial law paving the way for the extradition of criminal suspects to China. The prospect of an end of protests and Hong Kong's return to the normal course is important not only for the region but also for Washington-Beijing's relations and reducing the trade tensions. This may facilitate a return to talks between the USA and China.

Both events also allowed the EUR/USD exchange rate to return above the 1.10 boundary. The improved sentiment was also observed in the case of the yuan. The USD/CNY pair fell below the 7.15 limit. It is also worth noting that the weaker dollar also allowed for a strong rebound of the pound against the US currency. This move and partly global sentiment were also supported by the night events in the British parliament. However, in the case of Brexit, the sentiment may deteriorate very quickly. Why?

Uncertainty regarding pound still present

The success of the opposition in including a law on extending the Brexit deadline to the end of January 2020 in the agenda and its likely adoption in today's vote helped both the pound and global sentiment. The reputational damage to Prime Minister Boris Johnson (21 conservatives, including several key ones, were expelled from the party) also gave investors hope that the chances of avoiding hard Brexit increased. It seems, however, that this is too optimistic an approach to the matter.

The events of recent hours inevitably lead to early elections - whether through the lack of a parliamentary majority and the fall of the government, through the loss of a vote of confidence, or through the self-dissolution of the House of Commons and the two-thirds of the votes needed to do so. The results of the future elections, taking into account the radicalisation of conservatives and the extremely controversial economic plans of the labourists (details in yesterday's analysis), create problems.

If Boris Johnson and supporters of the confrontational approach to Brexit and Brussels had managed to win the elections, the mandate would have been so strong that the chaotic exit of Great Britain from the European Union at the beginning of next year or even earlier would return with a doubled force. Given the polls, the victory and the government led by Johnson appear to be the most likely at this point, even though the recent reputational damage. Such a scenario could push the pound into the new 30-year lows against the dollar and keep the British currency within these limits for a long time. It is possible that the pound could be valued at 1 EUR if the negative impact of the chaotic Brexit were less severe on the eurozone than currently expected.

Zloty appreciates

The Polish currency responded quickly to improving global sentiment and the weakening of the dollar. The EUR/PLN exchange rate fell below 4.35, which should be seen as a good signal for the zloty. The increased likelihood of a return to talks between the USA and China (consequences of positive events in Hong Kong) and the chance to avoid hard Brexit on October 31st, also depreciated the franc to approx. 4.00 PLN.

The zloty should maintain the increases of the last few hours. Optimism about the Brexit, although temporary in our opinion, will probably accompany investors until the end of the day, and the trading issues after the start of the session in the USA will also help rather than harm the PLN.