2016 has provided a number of surprises for the currency markets, with global events including the Brexit vote, Trump’s victory and the Italian Referendum causing increased volatility. We expect that political events in the UK, USA and Europe will continue to influence the markets as we head into 2017, and there are several politically significant events that could cause further fluctuations for global currencies:
At the start of the year, global markets will be focused on the US and the beginning of Trump’s presidency. Then attention will start to shift the UK and the triggering of Article 50, and then to elections in the Netherlands, France and Germany.
We’ve taken a look at these events and what they could mean for the Pound, the Dollar and the Euro.
USA: Trump takes control
So far, the overall market reaction to the election of Donald Trump has been positive and the Dollar has been rising against most major currencies. This is thought to be primarily because Trump is expected to provide a boost to the US economy through tax cuts, infrastructure spending and deregulation.
This was reflected in the final Federal Reserve meeting for 2016, at which chair Janet Yellen suggested there could be three rate hikes in 2017 due to the increase in both growth and inflation that they expect to see as a result of Trump’s policies. The Dollar index rose to a 14 year high following these comments, increasing against most major currencies.
But while the current situation is looking positive for the Dollar, there are also some concerns about Trump’s protectionist policies and what his approach to trade deals could mean for the Dollar. So from 21st January, Trump’s first full day as President, investors will be watching closely to see whether he will follow through on election pledges such as building a wall between the USA and Mexico, renegotiating NAFTA and increasing trade tariffs with China.
UK: Brexit begins?
The Pound has been driven by the EU Referendum vote for much of 2016, and the outcome of this is likely to continue having a significant impact into 2017. At this point, there are two key Brexit events that the markets will be watching closely.
The first is in early January, when the Supreme Court will rule on whether or not the UK Government can use its Royal Prerogative to invoke Article 50 or whether an Act of Parliament will be required. While this is unlikely to prevent Brexit from happening, it could create further obstacles to the process. Markets have previously responded positively to news of potential delays to the Brexit process, such as the original High Court ruling on this decision in November, so a ruling against Theresa May might provide a temporary boost for the Pound.
But in the meantime, Theresa May has indicated that she still plans to trigger Article 50 by the end of March. This could be helped by the fact that MPs overwhelmingly voted to adhere to her timetable in a House of Commons vote last week; while not legally binding, this suggests that Article 50 may be triggered in March regardless of the Supreme Court ruling. But at the same time, MPs supported a Labour motion calling for Parliament to “properly scrutinise” the government’s plans for leaving the EU before Article 50 is triggered.
While in reality nothing should change overnight once Article 50 is triggered, this event could be seen as important symbolically. It is possible this could weaken the Pound, as markets have been showing nerves around Brexit and this could be seen as final confirmation that Brexit will indeed go ahead. On the other hand, markets don’t like uncertainty, and so the triggering of Article 50 may help to relieve some pressure on Sterling in this respect if it starts to provide some clarity on issues such as the UK accessing the single market and movement of people.
Investor reactions may be guided by exactly what kind of deal the UK is seeking (e.g. a ‘hard’ or ‘soft’ Brexit); the less dramatic the change, the more reassured they are likely to feel. Last week’s House of Commons vote for a plan that is properly scrutinised in Parliament could also help to calm nerves, as it now seems likely that more information will become available prior to the triggering of Article 50 than had previously been expected.
Europe: all change at the top?
There are a number of scheduled political events across Europe that could make the markets nervous:
- The Netherland’s general election on 15thMarch 2017. Polling is close between the current liberal VVD party and far-right Freedom Party (PVV), led by Geert Wilders who was recently found guilty of inciting discrimination against Dutch Moroccans.
- France’s presidential election: first round on 23rdApril, second round on 7th May 2017. Candidates are still being selected, but there has been speculation about whether Marine Le Pen, leader of France’s anti-immigration Front National, could win. Le Pen has promised a similar referendum to the UK on France’s membership of the EU.
- Germany’s federal election is due to take place between 27thAugust and 22nd October 2017. Angela Merkel has stated she will seek a fourth term as German Chancellor, but criticism of her refugee policy makes the outcome uncertain. Opinion polls suggest she is currently the most popular choice, but support has been increasing for right wing populist party Alternative fur Deutschland.
There is also a possibility that there could be a general election in Italy at some point in 2017, following Matteo Renzi’s defeat in the recent Italian referendum on constitutional reform. Opinion polls suggest that the Five Star Movement, which supports Italy leaving the Eurozone, is currently running neck and neck with Renzi’s Democratic party.
A common theme throughout these political events is a potential to demonstrate the same increase in anti-establishment sentiment that seems to have happened in the UK and the USA in 2016. They could all result in a change of leadership, which naturally creates some uncertainty and can cause temporary currency volatility. So it seems likely that at least some of these events could result in downward pressure on the Euro during 2017, and possibly beyond.
2017: more curveballs to come?
2016 has been a year of surprises, some of which have had a significant impact on the currency markets. And the political events planned for 2017 mean that there is a possibility that we will see some more fluctuations in global currencies.
But during periods of potential volatility this year such as the EU Referendum and the US Elections, HiFX has remained opened for business. And whatever happens next, we’ll still be here to help you manage your international payments. We provide a range of tools and services to help our customers manage their money, and support businesses as they look to minimise the risk of foreign exchange volatility on their bottom line.
If you’d like to find out more about how we can help you, please contact us.
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