What’s next for Pound Sterling, the Euro and the US dollar?

The dollar is in decline. The global reserve currency had a torrid 2017, and that trend has continued into 2018. Having initially rallied after the election of President Trump, since his January 2017 inauguration the dollar has fallen consistently. Even the first major overhaul to the US tax system in 30 years has done little to aid sentiment.

This has subsequently impacted both Sterling and the Euro. The former traded a post-Brexit high above $1.39 within the first three weeks of 2018, while the latter climbed to a 3-year high above €1.23 against the greenback.

But what could help plug the dollar leak? In the early part of the year, traders will be carefully watching both the European Central Bank and the US Federal Reserve as both institutions make drastic in-house changes.

The former has begun tapering its vast Quantitative Easing (QE) scheme in 2018, a process which will eventually see asset purchases fall to zero. Just how fast President Draghi and the rest of the Governing Council decide to taper purchases will be key to the Euro’s performance over the course of the year. With the current tapering deal running until September, expect an announcement in the preceding months and potentially as early as March.

Meanwhile, the US Fed will have a new face at the helm. Outgoing Chair Janet Yellen will be replaced by Governor Jerome ‘Jay’ Powell, a former investment banker nominated to the top job by President Trump. Many on the outside believe that Powell will be more hawkish than his predecessor, accelerating the rate at which the Fed will hike rates. But as a conforming member of the FOMC since beginning his governorship during the Obama administration, will Powell instead follow his former boss in committing to a steady pace of hikes?

Last, but certainly not least, Brexit negotiations between the UK and EU will reach full throttle in 2018, and are expected to reach a critical venture in Autumn. Chief EU negotiator Michel Barnier has suggested a transition agreement could be reached by October. But with a colossal amount of legal complexities needing to be resolved, can a deal be hammered out in time? Or might delays put Britain’s EU exit in a precarious position?

How might forward contracts benefit you in 2018?

As mentioned earlier, forward contracts can act as protection when FX markets move against your positions.

In a hypothetical example, if an individual wanted to exchange $100,000 into Sterling after selling their US home, but GBP/USD (Cable) rallies to 2016 highs of $1.50 by the end of 2018, securing a forward contract at $1.35 could save the individual £7,400. Forwards also work should your currency pairing be subject to a sharp devaluation.

For example, a business needs to exchange £100,000 into Euros to buy goods, but GBP/EUR falls to €1.05 (2017 lows) by the end of the year, securing a forward contract at a rate of €1.13 now could save the business £6,000.

Remember, in both examples, if the market moves in your favour you are still obliged to pay the agreed forward contract rate by the agreed date, regardless of the rate.

Over the page, our report concludes with technical analysis of our clients’ top three traded currency pairings, GBP/USD – or ‘cable’ – GBP/EUR and EUR/USD. Which currency pairing are you most affected by?