Few could have predicted the tumultuous road that Sterling would take in 2016. Yet by October, some global investment banks were suggesting that £1 could soon be worth €1. However, the pound could be on the path to recovery having managed to hold its own and even rally against its US and European counterparts in Q1.
Over the coming 13 weeks, the calendar is packed with several major global events that could see foreign exchange markets follow the trends of the first three months of this calendar year, and even more that could alter it entirely. Below, we highlight the top four events that you should be watching closely over the course of Q2.
The headline event of Q2 takes place just a short hop across the English Channel, as voters in France elect their new President in May. The campaign has not been short of controversy, with early front runner François Fillon dogged by a corruption scandal which has seen his wife formally investigated for fraud. This has given momentum to the left-wing independent candidate Emmanuel Macron, whilst right-wing and anti-EU candidate Marine Le Pen spearheads the European populist movement. The first round takes place on 23 April, seeing two finalists advance to fight it out in the second round of voting on 7 May. Le Pen is predicted to win a tight first round; however, Macron is then expected to win the second. A victory for Macron could usher in a fresh era of pro-EU politics, whilst Le Pen has stated she wants to leave the bloc and reinstate the Franc. Who will win?
Soon after the French election, European legislators will once again have their hands full with the talk of Brussels – Brexit. Q1 saw the official triggering of Article 50 by the UK, which has begun the 2-year process of Britain negotiating its divorce from the EU. The EU will now meet on April 29 at a special summit to discuss the terms of the withdrawal and adopt negotiating guidelines, after which, formal negotiations between the UK and the bloc begin. Topics likely to be covered include the rights of UK and EU citizens abroad, market access for specific sectors (particularly finance) and the total bill the UK is expected to pay before leaving. As excerpts of talks are released to the press, FX markets are likely to move in favour of who they see as receiving the best deal.
Central banks have played a key role in FX markets so far in 2017, yet their impact could be even more profound in Q2. Despite the US Federal Reserve raising rates in March, investors were disappointed policymakers did not increase its forecasts for further hikes from 3 to 4 before year-end. This resulted in an unusual currency depreciation despite a central bank rate hike. At their two upcoming Q2 policy meetings, could we see the Fed meeting investors’ wishes with a dot plot uptick? Or might they instead dial back hawkishness in a repeat of 2016?
Meanwhile in Europe, surprising hawkishness from both the European Central Bank and the Bank of England saw both the euro and Sterling cut into the dollar’s FX dominance. A suggestion that the former could taper and/or cut rates before end-2017, alongside a dissenting hawkish BoE vote gave both currencies a strong tailwind. Officials have been quick to allay fears accommodative policy could be removed sooner rather than later.
Donald Trump was the talk of the town in Q1. Inaugurated in January, Trump has wasted no time in looking to enact his divisive campaign agenda, although is yet to achieve a legislative victory. His attempted travel ban was blocked not once, but twice, while the vote to repeal and replace Obamacare was pulled at the 11th hour. However, with these policies now seemingly on the backburner, the Trump administration may look to fast track other pro-market and pro-growth policies, including tax reform, infrastructure spending and sector deregulation. If successful, these policies could increase US growth and subsequently influence Federal Reserve policymakers’ thinking. After a (relatively) quiet Q1 in Trump terms, could he score his first legislative winner this coming quarter?
Over the page, we take a look at what some of the biggest names in global finance think will happen to the world’s most traded currencies, including the US dollar, Pound Sterling and the Euro. What will you make of their outlook?
