Will the pound go up? (Afternoon analysis 23.03.2018)

Weak sentiment in the market continued to have a limited impact on currencies today. Clearly better than expected data on orders for durable goods in the US with limited impact on the dollar. The pound received another positive signal from one of the Monetary Committee members.

Stabilisation on the market

Despite the still relatively weak sentiment in the market connected with potential restrictions imposed on global trade (customs duties from the USA and China), changes in the currency market were relatively limited today. This is probably caused by the fact that it is not entirely clear which tariffs will actually be implemented and to what extent. In turn, this makes it difficult to assess the impact of additional duties on individual countries and their currencies. Therefore, the foreign exchange market approaches the customs war with a considerable reserve.

The main currency pair (EUR/USD) quotations fluctuated around 1.23, as they did yesterday. Its quotations were also affected to a limited extent by macroeconomic data from the USA. The increase in orders for durable goods amounted to 3.1% per month, although it was expected to be twice as low - therefore orders grew at the fastest pace since the middle of last year.

Looking at the zloty's quotations, very little has changed. The euro remained still in the range of 4.22-4.23 PLN, and the dollar in the range of 3.42-3.43 PLN. Moreover, in relation to other basic currencies, the zloty's value oscillated around yesterday's levels. Chances for even more violent movements on the zloty are limited today. The significant deterioration of the market sentiment, which could have a negative impact on the zloty, is also rather limited (European market indexes rebounded in the morning, and the US ones started the day positively).

The pound situation in the near future may be interesting. Despite yesterday's relatively hawkish meeting of the Bank of England (2 members voted in favour of an increase in rates), the pound depreciated a little. However, the European Union's agreement with the United Kingdom on the Brexit issue, in addition to the hawkish signal from the British central bank, could support the pound.

The British currency can also be supported by today’s speech from Gertjan Vlieghe's (one of the Monetary Committee members of the Bank of England). He claimed that in his opinion interest rates could be increased by 25 or 50 basis points per year over the bank's projection period. This would bring a more neutral rate which, according to Vlieghe, was significantly below that which was observed before the last financial crisis.

Today, the pound appreciated by about 0.5% in relation to the dollar, reaching a price of 1.42 USD. It is really close (about 7 cents) to set new course records since the referendum on Brexit from mid-2016 (before the referendum it was approx. 1.49). Moreover, the pound in relation to the zloty gained by going up to 4.85 PLN. Taking into account the recent positive signals for the pound (and the relatively weak zloty), its price may soon exceed 5 PLN. However, to reach the exchange rate before the referendum 0.85 PLN is still missing.

Next week's preview

Global trade and customs wars will probably continue to exist next week and may also have a significant impact on exchange rates. Sentiment deterioration connected to potential escalation of the conflict could result in the capital outflow from the more risky asset classes to more secure ones, which, in turn, could also weaken the zloty.

Thursday may turn out to be important for the Polish currency due to data from the USA. The Bureau of Economic Analysis (BEA) will publish a private income and spending report which will provide information on PCE inflation (the type of inflation that is taken into account by Fed in the macroeconomic projections). The core index (excluding energy and food prices), which is relatively more important for the inflation evaluation, in November-January, was at the 1.5% level per year.

The median of market expectations indicates an increase to 1.6%. If the reading turns out to be 1.7% or higher, it will be the highest level of core inflation in a year. Taking into account the recent relative hawkish FOMC meeting and the simultaneous weakening of the dollar, higher than expected inflation data may provide the market with an argument for a rapid strengthening of the US currency.