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?
