Quiet start to what could be an explosive year
There has been a lot of sideways movement in the last few weeks for currencies but we are likely to see significant shifts in exchange rates over the coming weeks and months as we contend with a wide range of events: on-going Brexit talks (has anything ever been so tedious but so incredibly important?) Italian elections, German coalition talks, and a somewhat unpredictable President in the White House. Let’s analyse how these events could impact the currency markets in the coming months.
Positive news for the UK doesn’t necessarily point to sterling strength.
Brexit
When it was revealed phase two of the Brexit talks will begin soon, sterling still weakened against the euro and dollar. One would have expected the markets to have been encouraged by this sign of progress but, for whatever reason, it didn’t work out that way. At least in the short-term anyway. It is one thing to be unable to predict whether Brexit-related news will be positive or negative, but entirely another when positive news for the UK doesn’t necessarily point to sterling strength.
Italian elections
On 28th December 2017, President Sergio Mattarella dissolved the Italian Parliament to make way for an Italian general election on 4th March 2018. In 2013, none of the three main parties won an outright majority and the forthcoming election represents the next major political test for the European Union. As it stands, it is highly possible that the victor will struggle to secure a majority which would result in a hung parliament. If this proves to be the case, the resultant uncertainty could take a toll on the euro.
German coalition
German Chancellor Angela Merkel suffered a setback when her Christian Democratic Union party failed to win the German federal election back in September. The Christian democratic political alliance she leads won 33% of the vote, a drop of more than 8%. The far-right Alternative for Germany Party secured 12.6% of the vote. Since then, an attempt to form a coalition government broke down and the question is whether Merkel will succeed in a second attempt. As the Eurozone’s largest economy, it is important for a stable government to be formed sooner rather than later, though it is expected that talks will last until at least March. Merkel recently began fresh talks with the Social Democrats but there is no guarantee an arrangement will be reached. Yet more political uncertainty in the Eurozone that could put the euro under pressure.
Donald Trump
Since Trump became President, the US economy has undergone something of a boom. Unemployment is at its lowest point for 17 years, the stock market is prospering and GDP growth is healthy. However, there is still debate on just how much credit Trump can take for this. His recent tax reforms did not boost the value of the dollar as much as some quarters expected, and it should be noted that job gains are still below the average we saw during Barack Obama’s reign. The question really is, whether any further legislative changes will take place this year and, if so, what impact they will have on the economy and the dollar.
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How extreme could these movements be?
Last year we saw a range of just over 12 cents for the euro and nearly 16 cents for the US dollar against sterling. The year before (2016) the movement was close to 30 cents for both currencies against sterling. You could argue that the Brexit vote was a one off but that ignores the Scottish Referendum which was a mightily close run thing which could happen again, the European debt crisis in the southern states, which could happen again, and, who would have bet at the start of the year on Theresa May and Donald Trump being in power at the end of 2016.
Talk to the experts
That is why it is best to avoid economic data and currency forecasting and simply stick with the facts, your budget, and an understanding of the risks and the possible solutions that could impact it. To do this please talk to a trader as soon as possible. They will work with you to devise a bespoke currency strategy that protects your budget from the risks that go hand in hand with sending money overseas.
For example, they can help you lock in an exchange rate for a future transfer using a Forward Contract. This is ideal for anyone who is required to pay a deposit now, but knows they will have to wait weeks to complete. It secures their exchange rate for up to a year, on payment of a deposit, protecting the value of their property from any adverse fluctuations before they complete.
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