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Forex Annual Market Recap – 2017

Colin First
Key stats out of the UK over the next few days could reinforce an August rate hike by the BoE, while FED Chair Powell may need to elaborate on possible effects of the trade war in the economy and policy.

This is mostly because the Fed was the only major central bank at the time that has started to raise interest rates. The Euro, the Pound, the Australian Dollar, and the Canadian dollar all outperformed the U.S. currency during 2017, with only the Japanese Yen having a less impressive year. The Federal Reserve was on pace to tighten rates 4-times as 2017 commenced, but the central bank was only able to pull the trigger 3-times during the year. The ECB and the BoJ kept monetary policy very accommodative, while the Bank of England joined the normalization party late in the year.

The Euro – A stronger Euro is Expected in 2018

The Eurozone economy is ending 2017 moving in the right direction, at least when judging by PMI readings, with the manufacturing sector accelerating with confidence and the recovery broad-based across countries as well as sectors. GDP is set to be largely unchanged from Q3, the highest in 10-years. Data points to a robust start to 2018, but in the central scenario, growth is expected to level off slightly next year. As a result, the ECB may be missing its best opportunity to start signaling the turn in the cycle, without adding to slowing momentum.

Looking ahead, there are signs, that the annual growth rate has peaked for this part of the cycle. This is partly due to the fact that the output gap is expected to close next year and companies are already running into capacity constraints according to PMI reports, which means inventory declines will detract from overall growth in Q4. Companies remain sufficiently optimistic about the outlook to invest in an expansion of overall capacity and employment.

Unemployment levels have come down and while the ECB continues to argue that underemployment has failed to come down to the same extent since the crisis, the December PMI survey reported that the employment growth was the joint-highest since September 2000. The turn in the cycle has helped the Euro stay relatively buoyed against the dollar and the yen.

Canadian Dollar – Data Supports the Loonie

The Canadian dollar surged early in the year and developed a positive trend that lasted until September. For the majority of the Q4, the greenback has gained traction, despite robust inflation figures from the U.S.’s neighbor to the north. The Canadian economy should see GDP on track for a 2.6% growth rate in Q4 matching the Bank of Canada’s 2.5% estimate. Given the BoC’s focus on the data, such a result would be supportive of expectations for multiple rate hikes next year.

The British Pound – Brexit and BoE will Influence the Sterling

Sterling rebounded at the beginning of 2017 and experienced a robust 13 big-figure gain, as solid growth brought on the notion that the BoE would tighten monetary policy. For the BoE the problem is that inflation remains high and at 3.1% year over year in November, considerably above the 2% target. Still, the BoE highlights that this is to a large extent due to import price inflation and the past depreciation of sterling. The overall assessment hasn’t shifted much since the November inflation report.

The US Dollar – New Chairman, New Policy

Chair Yellen oversaw her last Federal Reserve Monetary Policy meeting in December, and will now pass the baton to Gerome Powell. The policy is likely to remain accommodative, as the Fed continues to normalize policy. The Fed tightened rates in December, with 2-dissents, but will likely pull the trigger another 3-4 times during 2018. The Fed updated its growth forecast, and with a Tax cut now in place, GDP could stay above the 3-handle. Interest rates rebounded in December, but with the 10-year below 3%, it will be difficult for the dollar to make a substantial move against most major currencies. The dollar did improve against the Yen which should remain subdued given the ultra-low interest rates that were just maintained by the Bank of Japan in December.

This article was originally posted on FX Empire