The pound under pressure (Afternoon analysis 08.08.2018)

The risk of a "hard" Brexit concerns the market - the British currency goes even lower. China imposes tariffs on an additional 16 billion dollars of imports from the US. The zloty remained stable.

Brexit without a deal more realistic than before?

Today was another bad day for the pound. The value of the British currency dropped to approximately 1.285 USD at about 3 p.m. This is the lowest level since nearly a year, also in relation to the euro it was worth the least in 9 months, and to the zloty in 5 months. This is still the result of increased uncertainty surrounding the process of leaving the EU and the increased likelihood of a 'hard' Brexit option, i.e. without a deal with the Bloc.

Also today, Bloomberg reported that the UK Prime Minister, Theresa May, is planning an extraordinary meeting of her top-level ministers in early September. The aim is to prepare for the eventuality of the aforementioned "hard" Brexit. The mere fact that such information appears will put pressure on the pound. It is likely that only progress in the negotiations with the EU, which would reduce the possibility of a potentially chaotic departure from the EU, could significantly improve the condition of the British currency.

In the afternoon, China also announced the imposition of new tariffs on US imports worth 16 billion USD. This slightly worsened the sentiment on the market. The main European stock indices, as well as futures for their US counterparts, pared most of the earlier gains. The dollar somewhat strengthened but only slightly - the EUR/USD pair was still around 1.16.

The zloty remained stable for most of the day, under this increased level of uncertainty. With the exception of GBP/PLN pair, the zloty's value in relation to major currencies was close to yesterday's levels. EUR/PLN oscillated around 4.26 - it is still the lower limit of the last three months. There are no significant publications planned for the following hours, hence the base scenario should be a stabilization of the zloty around current levels.

However, given the actions of the Chinese authorities, the US response to the imposition of additional tariffs (there is a risk of duties on an additional USD 200 billion of Chinese goods) would result in a significant deterioration of market sentiment and put a lot of pressure on equities, which could also have a negative impact on the overall Polish zloty basket.

Tomorrow's preview

The U.S. Department of Labor will publish on Thursday a weekly initial jobless claims report at 14:30 am. The number of claims submitted fell a month ago to its lowest level since December 1969. (208,000). It increased to 217,000 and 218,000 in the next two weeks, respectively. Although the market consensus estimates a further increase to 220,000, these readings are still close to recent multi-year records and should not have a significant impact on the dollar's prices even in the case of a slightly higher number of claims.

At the same time, the Bureau of Labour Statistics (BLS) will report on producer inflation (PPI) in the US in July. Over the last two years, it has shown a strong upward trend, rising to 3.4% annually in June and being the highest in 6.5 years. A similar trend has been observed in the case of its core index, which does not take into account energy and food prices - two years ago it amounted to 0.7% year-on-year in July. This year in July the median of market expectations assumes a reading at the level of 2.8% (unchanged as compared to June).

Exceeding this level could strengthen the dollar, although the scale of change is likely to be limited. The market's focus will already be on the data on consumer inflation (CPI) in the US published on Friday, which may have a much greater impact not only on the dollar but also on a large part of the market.