Many world events throughout 2016 has caused the this years Forex forecast to be cloudy. With a large influence on the world currencies, politics will play a major role in setting prices this year. It will likely be a lot of volatility as it is difficult to predict market prices from politics. Even positive political influence have adversely affected markets in the past.
2016 has been an interesting year. There were impeachments of two presidents: in Brazil and South Korea. The ongoing Syrian conflict witnessed the fall of Aleppo as the worst humanitarian catastrophe in this generation continues. A coup in Turkey fails while the political stability still seems far from reach. The Trans-Pacific Partnership (TPP) negotiations comes to stand still with the new presidential candidate at the helm. Britain votes to leave the EU and Donald Trump becomes the next president. In addition, hacking scandals were uncovered while terrorists targeted Nice, Belgium, Pakistan and Orlando. While not all of these events were pivotal in the currency market, they all had a role to play and a few of them have directly caused big market waves that will be felt in the coming year.
The two biggest events that affected major currencies is the Brexit in June and Trump’s victory in November. They both contributed to large amounts of volatility in the markets coming up to and after the events.
Although stocks in the UK rebounded quickly, Brexit caused the British pound to fall to its 30 year low of 1.2159 to the U.S. dollar as the Bank of England cut rates down to 0.25% in efforts to revitalise its economy. The pound has since recuperated to 1.2339 over the New Years but has since fallen back down to 1.2279. As one of the worst performing major currency this year, the pound’s outlook for 2017 is far from cheerful. Analysts are forecasting a steeper decline in the pound’s value as the UK’s ambiguous direction in its exit strategy deepens the uncertainty already felt in the markets.
The euro was having a good year until the last two months. Hitting a low of 1.0360 to the dollar in the last remaining months of the year as the U.S. political influences causes the dollar to surge and the euro to fall. Upcoming political influences in 2017 such as the Federal election in Germany and the France presidential election will affect the euro. If fiscal stimulus replaces austerity much like in so many other cases when it come to election year, the euro may further weaken as prices rise along with interest rates.
It appears the market is optimistic that Trump’s promise of increase in investments will come to happen. The dollar and the U.S. markets surged after the election results were announced. The Federal Reserve showed equal optimism about the U.S. economy and raised rates for the second time in a decade with hints at three more hikes in 2017. Chief market analyst at CMC Markets has noted that the dollar is showing indications of being at par with the euro, “as the policy divergence between the ECB and the U.S. Federal Reserve continues to widen.”
Emerging market currencies are more prone to higher volatility. The Chinese yuan will likely weaken “over the next two years as government efforts to cool the housing market, easier monetary policy and higher U.S. borrowing costs spur capital outflows,” according to Deutsche Bank AG. Deutsche Bank also forecasts that “the world’s second-largest economy will slow in the first three months of next year, forcing the People’s Bank of China to cut interest rates in the second quarter.” This would adversely affect other emerging market’s currencies as well.
Preparing for 2017 means preparing for market impacts from politics. Although the market’s show optimism in face of Trump’s oncoming leadership, his actions may bring unwanted volatility to the market. Judging from his campaign it can be hard to predict which of his promises he will keep and which he will dismiss. The gains that were seen after the election may reverse after Trump’s inauguration. If this happens, along with further declines in the pound, the euro might come out on top.
Central banks will take a back seat in the coming year as politics are set to impact markets. Central banks will continue to play their role however influence from political elections as well as policies will be more pronounced. It will be an interesting year ahead, with lots of highs and lows with us hopefully sitting on the right side of both.
Credit to: Jessica Cooper