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[vc_row][vc_column width="1/1"][vc_column_text]If foreign exchange markets continue the past nine months’ trends into the end of the year, 2017 will be remembered as a terrible one for the US dollar and a fantastic one for the Euro.
However, with early signs that current trends could be reversing, will the fourth quarter of 2017 turn FX markets on their heads? This report reviews the most popular currency pairs in the UK and analyses where they could be heading next.
If 2016 was the year of politicians, 2017 has seen central bankers claim back their throne as FX kings.
While the Federal Reserve has been raising interest rates since 2015, the European Central Bank (ECB) and Bank of England (BoE) have lagged behind their North Atlantic peers in normalising monetary policy. Until now.
European central bankers have become increasingly hawkish in the latter half of 2017, which saw the US dollar fall to a 33-month low in September, while the Euro ascended to a 33-month high against USD.
Now, the Bank of England is also expected to get involved, with bond prices suggesting a greater than 80% chance that policymakers will raise interest rates for the first time since the 2007-8 financial crisis, reversing last year’s post-Brexit 0.25pt cut.
However, that does not mean all hope is lost for greenback traders. With Janet Yellen’s term ending in early 2018, and the current head of the Federal Reserve not in President Trump’s favoured books, the hunt is on for a new Chair. Could a more hawkish candidate, such as current Fed Governor Jerome Powell or Stanford academic John Taylor, revive traders’ appetite for the US dollar?
The triggering of Article 50 in March began the 2-year negotiating process for Brexit, by the end of which Britain will leave the EU. With or without a deal.
Since March, the various connotations of a good trade deal, a bad trade deal and even no deal have been discussed and debated fervently, but it wasn’t until negotiations began in mid-June that the potential tone of the talks became clearer.
While beginning in a friendly and productive tone, the negotiations have since become more centred on potential hold ups due to lack of concessions. Will the deadlock be broken in Q4 to help both sides progress into more meaningful discussion points?
As with all situations in the Trump era, nothing is inevitable until it has happened. However, the third quarter saw things take a turn for the apocalyptic.
US-North Korean tensions were ramped up in the third quarter, with the threat of nuclear war climbing to its highest in recent memory.
Thankfully, however, the Trump administration have also been working diligently to enact a round of tax cuts, a key campaign trail pledge from the President.
Speaker Paul Ryan believes that a Republican tax reform plan could be approved before the end of 2017. With that said, however will party divisions within the House strike again, thwarting the President of his first Congressional victory?
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Of the two Sterling pairings covered in this report, Cable has been far and away the best performer of 2017, benefitting from the US dollar’s sell-off to 33-month lows. In fact, the currency pairing touched its highest level since the UK’s EU referendum in June 2016 in Q3, a 14% rally from its January lows. In recent weeks, however, Sterling has retreated towards the $1.30 mark, although has encountered some rising lows support. Will the pairing retreat further or will it make another charge at 2017 highs of $1.365 from support at $1.31?
Brokers are currently negatively biased for Cable’s prospects according to broker data compiled by Bloomberg, with almost two thirds of brokers expecting downside to the current price, while the average target price is 0.8% lower than its current level. Recent updates reflect the brokers’ contrasting views, with Credit Suisse offering a bullish target of $1.37 (25 Oct), while UniCredit expect the price to fall to $1.20 at the end of Q4 (6 Oct).
Events: Fed – 1 November, 13 December; BoE – 2 November, 14 December; Tax Reform & Fed Chair selection
The closest thing to a Brexit barometer that financial markets provide, GBP/EUR had been trending consistently lower since the triggering of Article 50 in March until late August. However, the Brexit currency pairing looks to bottomed out in September following fresh post- ‘flash crash’ lows of €1.075, rallying to a high of €1.14 before retreating to support. Will the pairing take another leg higher or return to September lows?
Brokers are leaning towards a negative bias for GBP/EUR’s prospects, with 53% of brokers holding a lower target price for the end of Q4 than the current price according to Bloomberg data. These range from the bullish target of €1.25 from Day by Day (26 May) to Morgan Stanley’s bearish target of €1.02 (15 Sept). The most recent updates reflect the mixed outlook, varying from Credit Suisse’s €1.136 (25 Oct) to Barclays’ €1.111 (20 Oct).
Events: BoE – 2 November, 14 December; ECB – 14 December; Brexit – until March 2019
The best performing of the three pairings being analysed, Eurodollar climbed to a 33-year high in the third quarter due to a combination of Euro strength and Dollar weakness. However, the pairing retreated from its highs in September as the Trump administration made significant headway into proposed tax cuts, while the impact of an ECB quantitative easing taper has seemingly been fully priced in to the Eurozone’s single currency.
Brokers are neutral on EUR/USD’s prospects, with Bloomberg’s compilation of analyst data showing a 50/50 split on brokers’ target prices. These vary from the most bullish forecast of $1.25 by Nomura (19 Sept) to the most bearish target from Day by Day of parity (€1 = $1; 26 May). Notably, however, recent updates are relatively bullish. These include Credit Suisse’s $1.21 (25 Oct) and Credit Agricole’s $1.22.
Events: ECB – 14 December; Fed – 1 November, 13 December; Brexit, Tax Reform & Fed Chair selection
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Bullish: Nomura, Target $1.40, +5.8% (19 Sept)
Average Target: $1.32, -0.3% (25 Oct)
Bearish: RBC Capital Markets, Target $1.20, -9.3% (6 Oct)
Pricing data sourced from Bloomberg on 25 October. Please contact us for a full, up to date rundown.
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Bullish: Day by Day, Target €1.250, +11% (26 May)
Average Target: €1.124, +0.1% (25 Oct)
Bearish: Morgan Stanley, Target €1.020, -9.1% (25 Aug)
Pricing data sourced from Bloomberg on 25 October. Please contact us for a full, up to date rundown.[/vc_column_text][/vc_column][/vc_row]
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Bullish: Nomura, Target $1.25, +5.8% (19 Sept)
Average Target: $1.17, -1.0% (25 Oct)
Bearish: Day by Day, Target $1.00, -15% (25 May)
Pricing data sourced from Bloomberg on 25 October. Please contact us for a full, up to date rundown.[/vc_column_text][/vc_column][/vc_row]
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