Strong pound fluctuations will not disappear quickly (Afternoon analysis 14.03.2019)

According to the Chairman of the Monetary Policy Council, in Poland, there will be no rate hikes until 2022. The zloty remains stable. Another vote in the British Parliament may cause significant fluctuations in the pound.

Dollar somewhat weak

Today, the pound lost part of yesterday's profits, but in the context of the last two months its value remains relatively high. The British currency is strongly depreciated and its growth potential until the end of the year is about 5-10%, depending on events in the UK. Today, around 6:00 p.m., another vote on the Brexit. According to the document presented today by the government, there are two possible versions of an extension. The first one assumes a short (technical) extension if the agreement is voted through in parliament before 21-22 March. The second version assumes a longer delay for the government and parliament to find other solutions. The second option also involves participation in the May elections to the European Parliament.

The second option is the most probable solution that will be voted through today. It is also becoming increasingly clear that the current government is not in a position to reach an agreement with the British Parliament. So there is an increased chance of early elections, which could ultimately be positive in terms of the possibility to develop some form of agreement with the EU and its adoption by the British Parliament. In the short term, however, this also means great chaos, which would translate into significant fluctuations of the pound.

Yesterday evening, the British currency reached a new high in relation to the dollar - about 1.3380. Today it returned less than 1% of that by afternoon. However, given the uncertainties about today's vote and the date by which the Brexit will be extended, significant fluctuations in the British currency are very likely.

Given the weaker than expected data from the US economy (especially inflation) and the strong appreciation of the pound, the US currency remained somewhat "in the shadows" and gradually depreciated. The euro rose yesterday evening and again this morning to nearly 1.1340. Although it is still relatively low in the context of recent weeks, it is even above the level observed just before the European Central Bank announced that it would not raise interest rates this year (around 1.1300). The dollar needed a strong labour market report and inflation - the former, however, was somewhat distorted by the surprisingly low employment growth and the average consumer price increase turned out to be lower than market estimates. This increases the chance that it may still take a few weeks before the dollar enters the appreciation path again.

In these circumstances, the Polish currency is a good condition. The zloty benefits from the lack of dollar appreciation and the still good situation on the equity market (despite reports of possible problems in negotiations between the USA and China). The market has also not been particularly concerned about the comments made by the Chairman of the Monetary Policy Council, Adam Glapinski, that interest rates are likely to remain unchanged until the end of his term of office, i.e. until 2022. However, this is a relatively distant future, and the MPC is also strongly dependent on what the ECB will do in the context of interest rates. The zloty's basket remains stable, and today's fluctuations should mainly be limited to the GBP/PLN pair due to the vote in the British Parliament. The volatility may be very large and reach even 0.10 PLN.

Tomorrow's preview

At 11:00 a.m. Eurostat will publish data on consumer inflation (CPI) in February. This will be the second reading, so no significant changes are expected. The most important piece of news is that the ECB will not raise interest rates this year. The underlying does not show an upward trend - it’s been revolving around 1 per cent for a long time now.

At 2:15 p.m., the Federal Reserve will present data on industrial production in February. The median of market expectations indicates an increase of 0.4% per month, with an increase in the activity of the largest component - manufacturing - by 0.3%. At 3:00 p.m., the University of Michigan will publish preliminary data on the US consumers sentiment index in March. It is expected to increase by 1.5 pts to 95.3 pts., which would be in line with the market situation: a strongly increasing equity market since the beginning of the year and a pause in the increase in interest rates by the Federal Reserve.

After all, this now makes the pause duration even more dependent on the incoming data. If the data are better, the chances of rate hikes in the second part of the year will increase. Therefore, we can expect an increase in the dollar's fluctuations in the afternoon. Taking into account the state of the economies of the USA and the eurozone, in the long run, the dollar should appreciate in relation to the euro. In the case of the zloty, fluctuations should be limited to the USD/PLN pair and potentially the CHF/PLN, if the afternoon publications would differ significantly from the consensus and trigger considerable movements in the markets for more risky asset classes, including shares.