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Home / Special Reports / Q3 Foreign Exchange Outlook

This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

9 July 2017

Q3 Foreign Exchange Outlook

This year continues to provide surprise after surprise for foreign exchange markets to digest. Just when markets thought that major European elections were over, a snap UK election provided the latest global political shock, continuing the trend of the past twelve months. And now, with the fallout from the election yet to take its final form, FX markets now have a multitude of other factors to take into account as well. It’s set to be a fiery summer.

This report outlines those all-important dates of major global events over the coming three months that could heavily influence FX markets, as well as providing in-depth analysis of UK traders’ most popular currency pairings over the page. Could the political and macroeconomic events listed below affect your favourite pairings?

Brexit bounces to Brussels

After a disastrous election campaign for the Conservative party which saw its parliamentary majority wiped out, Brexit negotiations between the UK and the EU have officially begun. The minority government now faces the momentous task of negotiating Britain’s exit from the trading bloc, a challenge that could see up to 19,000 pieces of legislation re-written into UK law. Furthermore, firm guarantees will have to be made by both sides on workers’ rights, the Irish border and, of course, the final Brexit bill to be paid by the UK. And that’s just for starters.

Europe Turns Hawkish

While the US Federal Reserve has been gradually raising interest rates since December 2015, central banks in Europe have been left behind. Both the Bank of England and the European Central Bank have maintained interest rates at record lows as economic uncertainty weighs on policymakers’ decision making.

However, the ECB has started to become more hawkish in its rhetoric, raising the possibility of removing some accommodative policy stimulus as inflation returns to the Eurozone, while the BoE has begun to seriously consider raising interest rates as post-Brexit Sterling weakness has seen inflation approach 3%, well above the Bank’s target of 2%. Yet weak UK macroeconomic data in recent months has highlighted a divide amongst policymakers that will likely prove a contentious issue when the monetary policy committee meets on 4 August’s ‘Super Thursday’. Since Mark Carney began as governor, he has never voted for a rate hike and has always found himself in the majority. But will rising inflation force him to break from his dovish voting pattern in August?

Balance sheet provides Fed-ache

Meanwhile the Federal Reserve faces its own conundrum as policymakers debate how and when to address its bloated balance sheet. After three rounds of quantitative easing (QE) in 2008-12, the proceeds have been reinvested into US treasuries and the Fed’s portfolio has swelled to $4.5 trillion. Unravelling its vast reserves will mean the removal of the controversial policy that has underpinned bond markets and kept cheap money flowing. Last time tapering was suggested in 2013, it resulted in a vast sell-off. Could Q3 see a second ‘tantrum’?

Merkel looks fourth

Finally, it may seem some distance away, but the German Federal Election taking place on 24 September could prove to be a crucial event for the Eurozone and its single currency. While not expected to be as close an affair as France’s four-horse race in Q2, as recently as March the two main parties we locked on the same polling figure. The Christian Democratic Union’s Angela Merkel will be looking to win her 4th consecutive term as Chancellor by defeating the Social Democratic Party’s Martin Schulz, her closest rival. Can Merkel defeat Schulz at the polls and, alongside France’s new president Macron, lead the EU through to the conclusion of Brexit negotiations?

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?

Page: 01

GBP/USD ‘Cable’

Cable has been the rank outperformer of Sterling pairings, with the UK currency rallying strongly against its US peer. The dollar has been subdued as the so-called ‘reflation’ trade loses steam, while traders begin to question just how much further the Fed’s tightening cycle will take interest rates. However, the pound itself has come under pressure as macroeconomic data during Q2 came in much weaker than expected, seeing Cable come off its highs.

Brokers are currently negatively biased for Cable’s prospects according to Bloomberg data, with over 70% of brokers expecting downside to the current price, while the average target price is 2.1% lower than its current level. Recent updates, however, show brokers are neutral to bullish on prospects, with BoA Merrill Lynch (6 Jul) forecasting a $1.25 end-quarter figure while Macquarie (3 Jul) are more bullish, expecting $1.32 by the end of Q3.

Events: Fed – 26 July, 20 Sept; BoE – 3 Aug, 14 Sept; Brexit - ongoing!

GBP/EUR

As Brexit negotiations begin in Brussels, this currency pairing will likely ebb and flow alongside the latest developments in talks between the UK and the European Union, reflecting the standing of each of the parties at any given time. While the UK is looking to gain ‘frictionless’ access to the single markets, EU officials are likely to drive a hard bargain. Since the announcement of the UK election in April, the pairing has fallen to a 2017 low reflecting a weaker position for the UK in Brexit negotiations. Having traded predominantly in a tight €1.13-€1.14 range since the UK election result on 8 June, which way will the pairing break when the next catalyst arrives?

Brokers are currently negatively biased for GBP/EUR prospects, with 60% of brokers forecasting downside to the current price, while the average target price is 0.4% lower than the current trading level, as suggested by Bloomberg data. Recent updates from brokers agree with this negative outlook, with Wells Fargo (5 Jul) offering the greatest upside with a €1.149 target, while HSBC (30 Jun) expects €1.068 to be reached by the end of Q3.

Events: ECB - 20 Jul, 7 Sept; BoE – 3 Aug, 14 Sept; German Election – 24 Sept; Brexit - ongoing!

EUR/USD

While the Brexit pairing of GBP/EUR may be the hot topic in FX markets, how the European currency trades against its US peer will be a key indicator of how the market is reacting to the latest Fed rhetoric. The US Dollar Basket, a trade weighted basket of the greenback against its peers, fell to its lowest level since September in Q2. It’s no surprise then, that EUR/USD traded a fresh 12-month high of $1.145 in the quarter. Will the rally continue in Q3?

Brokers are negatively biased for EUR/USD prospects, with Bloomberg showing three quarters of brokers have a lower target price than its current price, while the average target price is 1.5% lower than at present. As before, brokers have differing forecasts on the Euro’s prospects, with Macquarie (3 Jul) once again bullish with a $1.17 end-Q3 target, while Day By Day (26 May) remain bearish, expecting a $1.02 figure by the end of the quarter.

Events: ECB - 20 Jul, 7 Sept; Fed – 26 July, 20 Sept; German Election – 24 Sept; Brexit - ongoing!

On the following three pages, we take a closer look at the technical indicators behind these three hugely popular currency pairings. What will you make of the analysis? Is your preferred currency pair set to move higher in 2017?

Page: 02

GBP/USD ‘Cable’

Will Cable return to September highs of $1.34 (+3.5%) or pull back towards 2017 lows of $1.20 (-7.3%)?
  • Failed to confirm new 2017 highs in June, edging back from $1.30 falling highs resistance. Back to $1.26 support?
  • Stochastic indicators show bearish crossover in overbought level
  • Momentum positive, however has fallen from its highs
  • Directional Indicators showing no bias; bearish cross or bullish kiss?

 

Bullish: Nomura, Target $1.34, +3.5%, (26 May)
Average Target: $1.27, -1.9% (6 Jul)
Bearish: RBC Capital Markets, Target $1.19, -8.1% (16 Jun)

 

Pricing and consensus data sourced from Bloomberg on 6 July. Please contact us for a full, up to date rundown.

Page: 03

GBP/EUR

Will GBP/EUR return to 12-month highs of €1.21 (+6.5%) or fall back to November lows of €1.05 (-7.6%)?
  • GBP/EUR is trading in a tight trading range predominantly between €1.13-€1.14. Will it break higher or lower?
  • MACD has fallen back from its highest level since April
  • Relative Strength Index remains stuck in lower half of chart, a bearish signal
  • Directional Indicators are diverging bearishly

 

Bullish: BNP Paribas, Target €1.220, +7.4%, (2 Jun)
Average Target: €1.142, +0.5% (6 Jul)
Bearish: HSBC, Target €1.064, -6.3% (30 Jun)

 

Pricing and consensus data sourced from Bloomberg on 6 July. Please contact us for a full, up to date rundown.

Page: 04

EUR/USD ‘EuroDollar’

Will EUR/USD break out to 2015 highs of $1.17 (+2.7%) or pull back towards Q2 lows of $1.057 (-7.2%)?
  • Fallen back from fresh 12-month highs. Bounce or break from rising lows support?
  • Stochastics hover bullishly around overbought level
  • Momentum positive but off best levels. Levelling out or further to fall?
  • Directional Indicators diverging bullishly

 

Bullish: Macquarie, Target $1.17, +2.7%, (3 Jul)
Average Target: $1.12, -1.7% (6 Jul)
Bearish: Day By Day, Target $1.02, -10% (26 May)

 

Pricing and consensus data sourced from Bloomberg on 6 July. Please contact us for a full, up to date rundown.

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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.

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