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1 July 2018

Q3 2018 Foreign Exchange Outlook

As financial markets are approaching the half-year mark, 2018 continues its topsy-turvy rollercoaster ride. Geopolitical uncertainty over trade, Europe’s economic downturn, and daily volatile back-and-forth of equity and FX markets can create a confusing headache even for seasoned market watchers.

Here at AccendoFX we believe that our clients become better investors when they can make orderly sense out of the ensuing cacophony. The following report is looking to provide a handy guide for FX investors to the most important events of the upcoming quarter and to give them a sense of direction for major FX pairs.

It has been a heady and tumultuous Spring, and the landscape for Q3 is looking to be just as eventful. Here are some of the key things to keep in mind.

Shadow of Brexit

Brexit continues to be a thorn in relations between the United Kingdom and the European Union, with negotiators unable to come to a satisfactory solution to major issues. With less than a year remaining till the final cut-off date for leaving the EU, the two sides are moving increasingly closer to an economic and social upheaval of “hard Brexit”.

While the current UK government of Theresa May has managed to successfully steward the passage of EU Withdrawal Bill through the UK Parliament, many questions remain about unresolved issues of Irish border, post-Brexit financial regulations and reciprocal rights of EU and UK citizens.

These tensions have become a considerable burden for the Pound Sterling and there are no clear indications yet that the UK government is politically prepared to table any breakthrough solutions in the upcoming months.

Trade Wars

Moving into the third quarter of the year, the main currency pairs are all under pressure of global trade uncertainty and rising geopolitical tensions.

Trump Administration’s protectionist policies have ignited a multi-pronged trade war, with China, EU and North America engulfed in escalating tensions. In spite of initial hopeful signs of a Sino-American trade compromise, both sides are now levying sanctions and counter-sanctions against each other.

While trade tariffs may be seen as beneficial to national economies via increased prices, in reality, their benefits are unevenly distributed and more often than not lead to net job losses in other sectors and a worsening outlook for a national currency.

Safety from the Storm

With US, Eurozone and the UK all affected by new reciprocal trade barriers, traders are seeking refuge in other safe-haven assets, including Japanese Yen, Swiss Franc, Nordic currencies, investment gold and US Treasury bonds, side-stepping the familiar trio of USD, EUR and GBP.

Prospects of a trade détente between major powers in the upcoming Q3 2018 look increasingly grim and the trade war confrontation is likely to remain the “new normal” for the time being.

Continue reading to find out more about the key drivers influencing major currencies and register with AccendoFX to work in direct partnership with an experienced FX broker.

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GBP: Macroeconomic & Geopolitical Drivers

The looming spectre of Brexit uncertainty continues to dominate the outlook for Pound Sterling. Lack of clarity on the thorny issue of UK-EU post-separation relationship is souring the GBP forecasts. Prime Minister Theresa May’s government is planning to publish a comprehensive White Paper on UK’s withdrawal from European Union following the EU Council meeting in late June but has so far refused to commit to a firm date, adding to the ambiguity and corresponding negative momentum for the Pound.

On the macroeconomic front, the Bank of England (BoE) is growing more hawkish, increasing the likelihood that the base rate will rise after the 2 August Monetary Policy Committee (MPC) meeting. The MPC’s hawkish outlook is supported by the Bank’s stated conviction that UK economy and price growth will improve later in the year.

An interest rate hike, which would be favourable for GBP FX pairs, would be predicated on better than expected UK economic data, including lower trade deficit and improved economic growth (i.e. GDP, consumer prices and retail sales).

Dates for your Diary
Date Event
TBD (est. July) UK Government’s Brexit White Paper
10 July May balance of trade (UK)
18 July June consumer price inflation (UK)
18 July June retail sales (UK)
2 August BoE’s Monetary Policy Committee meeting

BoE Inflation Report publication

10 August Q2 GDP, 1st estimate

June balance of trade (UK)

15 August July consumer price inflation (UK)
16 August July retail sales (UK)
11 September July balance of trade (UK)
19 September August consumer price inflation (UK)
20 September August retail sales (UK)
28 September Q2 GDP, 2nd estimate (UK)

EUR: Macroeconomic & Geopolitical Drivers

Continental economies remain under strain, with the latest round of automotive US tariffs hurting German manufacturing exports to add further insult to injury of Eurozone’s economic slowdown in the first quarter of 2018. That being said, FX markets are eager for more signs of German economic recovery after strong 2.2% May price growth. EUR traders are hopeful that June consumer prices will maintain May’s uptrend and that price growth will also be reflected in strong economic statistics in August and September.

The European Central Bank (ECB) has also shown some faith in Eurozone economic recovery by deciding to end its quantitative easing programme by the end of the year. The crucial test will come at the end of Q3, however, when the ECB is planning to taper its stimulus package by half, but only if “incoming data [confirms] medium-term inflation outlook”. With that in mind, FX traders will be closely eyeing German and Eurozone inflation figures throughout the summer for signs of recovery and for potential for EUR to regain some strength.

Dates for your Diary
Date Event
9 July May balance of trade (Germany)
12 July June consumer price inflation (Germany)
18 July June consumer price inflation (Eurozone)
26 July ECB monetary policy meeting
31 July Q2 GDP, 1st estimate (Eurozone)
7 August June balance of trade (Germany)
14 August Q2 GDP, 1st estimate (Germany)

July consumer price inflation (Germany)

17 August July consumer price inflation (Eurozone)
24 August Q2 GDP, Final (Germany)
7 September Q2 GDP, Final (Eurozone)

July balance of trade (Germany)

13 September ECB monetary policy meeting

August consumer price inflation (Germany)

17 September August consumer price inflation (Eurozone)
September End Scheduled tapering of ECB net asset purchases to €15 billion/month

USD: Macroeconomic & Geopolitical Drivers

United States economy exhibited signs of resilience in 2018, with low unemployment, healthy jobs growth and improved labour productivity. Headline economic growth was more disappointing, with Q1 GDP falling to 2% quarterly growth rate from 2.9% in Q4 2017. Consumer prices, however, have grown steadily, with the core inflation metric rising in the second quarter to 2.2%, above the Federal Reserve’s (Fed’s) 2% inflation target. Economists will be looking to Q2 GDP figures in July and August for a return to stronger economic growth, with negative impact on the USD if economic data disappoints again.

US trade confrontations with key allies and critical trade partner China could provide additional hindrance to the US Dollar in the upcoming quarter. FX markets are increasingly worried that reciprocal trade barriers could hurt US manufacturers, further straining the US economy. The willingness of all sides to return to the negotiating table is seen as a crucial benchmark for USD (and EUR) strength in the coming months.

The Fed continues its policy of interest rate normalisation, with two more federal funds rate hikes expected this year. Critical for the Dollar will be whether both increases will come in Q3, or if only 26 September meeting will see a rate hike, with the fourth increase delayed until Q4 2018. Higher interest rates are seen as a signal of Fed’s faith in US economy and typically lead to a stronger currency.

Dates for your Diary
Date Event
6 July June non-farm payrolls (US)

May balance of trade (US)

12 July June consumer price inflation (US)
27 July Q2 GDP, 1st estimate (US)
1 August Fed’s monetary policy update
3 August July non-farm payrolls (US)

June balance of trade (US)

10 August July consumer price inflation (US)
29 August Q2 GDP, 2nd estimate (US)
5 September July balance of trade (US)
7 September August non-farm payrolls (US)
13 September August consumer price inflation (US)
26 September Fed’s monetary policy update

Page: 02

GBP/USD (“Cable”)

Source: CMC Markets, Date: 27 June 2018

Will Cable return to 2018 highs of 1.437 (+8.22%) or fall to August lows of 1.277 (-4%)?

  • Cable is in a 2-month downtrend, with falling highs resistance providing a hindrance.
  • Relative Strength Index (RSI) and Stochastics are neutral, in a sign of technical “indecision”.
  • Trend strength (ADX) has peaked on 1 June and has been weakening since then.
  • Cable tested November 2017 support level several times in late June.
  • MACD crossed over the signal line at the same time, signalling potential for a bullish reversal.
  • Broker consensus is bullish, with 68% of brokers forecasting an upside from current levels.
  • Average target rate in the last month’s broker updates is 1% higher than current market.
  • Most bullish Q3 forecast from Standard Chartered, projecting a return to April highs, is 1 month old.
  • Latest broker updates have been largely stable, with Q3 levels generally in line with current market rates, suggesting that analysts are projecting low GBP/USD volatility in the near term.

Most bullish: Standard Chartered, Target: 1.42, +7% (30 May)
Average target: 1.34, +1%
Most bearish: RBC Capital Markets, Target: 1.27, -4.4% (8 June)

Data sourced from Bloomberg on 25 June, 2018. Please contact us for a full, up to date rundown.

GBP/EUR

Source: CMC Markets, Date: 29 June 2018

Will GBP/EUR return to May 2017 highs of 1.162 (+2.4%) or fall March lows of 1.115 (-2%)?

  • GBP/EUR trading in a rising channel since September, with recent trading closer to channel’s floor.
  • Stronger EUR (on news of EU leaders coming to an agreement on migration) sending the pair lower.
  • In a moderately bearish sign, MACD crossed below signal line on 21 June.
  • Broker consensus is overwhelmingly positive, with Bloomberg’s compilation of analyst data over the last 30 days showing that close to 73% of brokers have set a Q3 target rate above current market levels.
  • Most bullish and bearish broker updates are close to 1 month old.
  • Last week’s Q3 updates from several brokers, including Morgan Stanley, Danske Bank and UniCredit, are averaging closer to 1.139, slightly above current rates.
  • This suggests that Q3 2018 could see a continuation of sideways movement for GBP/EUR.

Most bullish: ABN Amro, Target: 1.176, +3.7% (29 May)
Average target: 1.136, +0.1%
Most bearish: Monex Europe, Target: 1.075, -5.2% (31 May)

Data sourced from Bloomberg on 25 June, 2018. Please contact us for a full, up to date rundown.

EUR/USD

Source: CMC Markets, Date: 27 June, 2018

Will EUR/USD return to April highs of 1.241 (+6%) or fall back to May lows of 1.151 (-1.6%)?

  • EUR/USD in a 2-month downtrend.
  • Pair tested 2018 lows of 1.151 twice, on 29 May and on 21 June.
  • Bounce from support in late June
  • Upside potential in Q3 is hindered by twin resistance lines: falling highs since mid-April and horizontal support-turned-resistance around 1.184.
  • In a bullish signal, however, MACD is trending higher and broken above signal line on 21 June.
  • Broker consensus has a positive bias, with two-thirds of analysts suggesting upside from current levels.
  • Most bullish Q3 forecast from Prestige Economics sees medium-term rate of 1.26, far above current levels, though reliability is low due to the update being a month old.
  • Recent broker update from Morgan Stanley (22 June) sees EUR/USD trading at 1.13 in Q3 2018, below current levels.

Most bullish: Prestige Economics, Target: 1.26, +7.7% (31 May)
Average target: 1.179, +0.8%
Most bearish: Bank Julius Baer, Target: 1.10, -6% (30 May)

Data sourced from Bloomberg on 25 June, 2018. Please contact us for a full, up to date rundown.

Page: 03

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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

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