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Home / Special Reports / Q2 Foreign Exchange Outlook

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

9 April 2017

Q2 Foreign Exchange Outlook

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?

Page: 01

GBP/USD ‘Cable’

Cable, having been under pressure in H2 2016 following the UK’s EU referendum and the US presidential election, has been somewhat quiet during the first quarter of 2017. In the first quarter, the pairing traded an early low of $1.1983 on 15 January based on Brexit concerns before rallying to its highest traded price of $1.2707 only two weeks later on 2 February. It has remained range bound since then. Will Q2 see a break of its narrowing channel?

Brokers are currently negatively biased for Cable’s prospects according to Bloomberg data, with 68% of brokers forecasting downside to the current price, while average target price is 1.3% lower than its current level. Recent updates show some conflict amongst brokers, with Credit Suisse on 5 April forecasting a $1.25 end-quarter figure, while Bank of America Merrill Lynch are far more bearish, forecasting a $1.15 end-Q1 target on 3 April.

Events: Fed - 3 May, 14 Jun; BoE - 11 May, 15 Jun; Trump & Brexit - ongoing!

GBP/EUR

This currency pairing could prove to be the most interesting over the coming two years as Brexit negotiations make their mark on the relationship between the UK and mainland Europe. The currency pairing has followed a similar trading pattern to Cable, although Sterling has made a much more marked recovery against its European peer. Similarly to GBP/USD, it traded at its low of €1.1827 on 15 January, while it took a little longer to trade a high of €1.1901, reaching the mark on 22 February. It also remains in a narrowing trade pattern as we move into Q2.

Brokers are currently negatively biased for GBP/EUR prospects, with 64% of brokers indicating downside to the current price, while the average target price is 0.5% lower than the current trading level as suggested by Bloomberg data. Once again, recent updates from brokers suggest mixed outlook, with a bullish 5 April forecast from Jyske Bank of €1.2195 at odds with Bank of America Merrill Lynch’s €1.1236 end-Q1 target.

Events: French Election - 23 Apr & 7 May; ECB - 27 Apr, 8 Jun; BoE - 11 May, 15 Jun; Brexit - ongoing!

EUR/USD

The Euro has been on a tear against its US peer since trading a 13-year low on only the second session of 2017. Since trading that low of $1.03401 on 3 January, however, it has recovered strongly, culminating in the pairing trading at its highest level since the US election on 27 March at $1.0906. While it has since fallen back below $1.07 having been hindered by 11-month falling highs resistance, it remains a way off January’s lows. Trading in a rising channel, could Q2 see the Euro overcome that long term resistance to post a fresh 5-month high?

Brokers are negatively biased for EUR/USD prospects, with Bloomberg showing 62% of brokers’ targets showing downside to its current price, while average target price is 0.6% lower than at present. As before, brokers have differing forecasts on the Euro’s prospects, with Credit Suisse (5 Apr) once again bullish a $1.10 end-Q1 target, while BoA Merrill Lynch (3 Apr) continue to be bearish, expecting a $1.02 figure at the end of the quarter.

Events: French Election - 23 Apr & 7 May; ECB - 27 Apr, 8 Jun; Fed - 3 May, 14 Jun; Brexit & Trump - 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 set to move higher in 2017?

Page: 02

GBP/USD ‘Cable’

GBPUSD (-)

Will Cable return to 2017 highs of $1.27 (+1.9%) or pull back towards 2017 lows of $1.20 (-4.5%)?
  • Falling back from second challenge of $1.26 falling highs resistance. Back to channel floor?
  • Stochastics recovered from overbought
  • Momentum flat from positive; Relative Strength Index falling highs resistance
  • Directional Indicators showing no bias; bullish cross or bearish kiss?

 

Bullish: Nordea Bank, Target $1.33p, +6.7%, (2 Mar)

Average Target: $1.23, -1.3% (5 Apr)

Bearish: BoA Merrill Lynch, Target $1.15, -7.8% (3 Apr)

 

N.B. All pricing and consensus data was sourced from Bloomberg on 5 April. Please contact us for a full, up to date rundown.

Page: 03

GBP/EUR

GBPEUR (-)

Will GBP/EUR return to highs of €1.19 (+1.7%) or pull back towards 2017 lows of €1.13 (-3.4%)?
  • Remains in narrowing pattern after second failure at €1.17 falling highs resistance. Third time lucky?
  • Stochastics holding in channel close to overbought
  • Relative Strength Index showing rising lows support
  • Directional Indicators showing no bias; bearish cross or bullish kiss?

 

Bullish: Morgan Stanley, Target €1.25, +6.9%, (9 Mar)

Average Target: €1.163, -0.5% (5 Apr)

Bearish: HSBC, Target €1.099, -6.3% (15 Mar)

 

N.B. All pricing and consensus data was sourced from Bloomberg on 5 April. Please contact us for a full, up to date rundown.

Page: 04

EUR/USD ‘EuroDollar’

EURUSD (-)

Will EUR/USD return to 2017 highs of $1.09 (+2.3%) or pull back towards 2017 lows of $1.035 (-2.9%)?
  • Fallen back from 11-month falling highs resistance. Bounce or back to channel floor?
  • Stochastics sharply turned oversold from overbought
  • Momentum negative. Levelling out or further to fall?
  • Directional Indicators diverging bearishly

 

Bullish: Credit Suisse, Target $1.10, +3.2%, (5 Apr)

Average Target: $1.06, -0.6% (5 Apr)

Bearish: Standard Chartered, Target $1.00, -6.2% (8 Mar)

 

N.B. All pricing and consensus data was sourced from Bloomberg on 5 April. Please contact us for a full, up to date rundown.

Page: 05

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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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