The Collins Dictionary has released its top 10 words for the year for 2016, a list that includes ‘dude food’ and ‘sharenting’ (the habitual use of social media to share news, images, etc of one’s children). But the word that beats other popular entries like ‘Trumpism’ and ‘mic drop’ due to the sheer volume of its usage – you’ve guessed it – ‘Brexit’!
After the Referendum result in June when Britain voted to leave the European Union, sterling fell dramatically against all the major currencies. In fact, the Pound fell to a 31- year low against the dollar. Donald Trump’s victory in the US Presidential elections and the result of the Italian referendum saw further fluctuation. Political events in the US, Europe and Britain are certain to further influence the currency markets this year. How will President Trump’s policies influence the performance of the dollar in 2017? What could happen to sterling once Article 50 is triggered? Upcoming elections in Europe are also important and given the steady rise in support for populist parties, downward pressure on the euro is a possibility for 2017.
Here we take a more detailed look at some of the current and pending geopolitical happenings likely to influence currency movements over the coming year and beyond:
1.The Trump presidency
The market’s reaction to Donald Trump’s election was initially positive. The greenback sored to a 14 year high and as recently as the 3rd of January the ICE U.S. Dollar Index recorded a peak of 103.97 against a basket of six currencies. The markets rallied, based on the political promise made by the Trump administration to introduce a series of tax cuts and infrastructure spending therefore boosting growth in the US economy. Fast forward one month and the reality is starting to bite. It now seems that a policy to deglobalise America is taking precedence over any plans for infrastructure spending.
The US dollar has posted its worst January in three decades after Trump and his trade adviser Peter Navarro accused Germany, China and Japan of exploiting currencies to gain a trade advantage over the US. This inspired some ANZ analysts to note “The early policy implication is that dollar competitiveness could have a prominent role to play in Trump’s ‘America First’ agenda.” There is even talk of raising trade barriers to countries wishing to sell to the American consumer market.
The contentious travel ban placed on people coming to the US from 7 selected predominantly Muslim countries has further contributed to the dollar’s decline. Analysts argue that this is another form of trade war, a restriction of intellectual capital that will ultimately damage the US economy.
A US Federal Reserve official has suggested a possible interest rate hike as early as March. The Fed is due to hold its interest rate meeting on or around March 14 and an announcement then is quite possible for the first hike of the year, depending on economic data between now and then. Two more anticipated rate hikes later in the year for 2017 may already be too optimistic and with President Trump’s policies having a polarising affect, investors are less confident of a one-way northbound ticket for the dollar.
2.Triggering of Article 50
The vote to leave the European Union saw the biggest drop in the value of sterling in decades. On June 24, the day after the vote, sterling reached a low of $1.3228, its lowest level since 1985 and continued to decline in the weeks and months ahead. With Article 50 expected to be triggered next month on 9 March, market uncertainty is still bearing on sterling. The UK High Court and subsequently the Supreme Court ruled that Parliamentary approval was necessary to trigger Article 50 and since then the impact on the Pound has been positive. Parliament has now voted 498 to 114 to move along the European Union (Notification of Withdrawal) Bill, which if passed will give Prime Minister, Theresa May, the ability to trigger Article 50, later in March. Theresa May has published the Government’s White Paper which sets out its plans for coming to negotiations on leaving the EU. Next steps in the process will be the passing of the bill and debate on any amendments in the House of Lords.
The triggering of Article 50 itself will probably not bring too much change to the currency markets. It is however, a symbolic step which could result in a weaker Pound given that that it will confirm that Britain is finally leaving the EU. On the other hand if investors receive assurance on issues like access to the single market and freedom of movement (‘soft’ Brexit), this would favour a stronger Pound. The markets will continue to react sensitively to any major Brexit news and updates but one thing is clear – 2017 will be a bumpy year for sterling.
Pivotal elections in Europe
FEXCO Corporate Payments analysed the factors that can influence foreign exchange rates and one fundamental issue is the political stability of a nation. This year will see a number of pivotal elections in the Netherlands, France and Germany, each with the potential to unsettle financial markets in the months ahead. Italy too could see a change in leadership with commentators expecting an election in June:
3.Election in the Netherlands
On 15th March, the Dutch will go to the polls in an election which could spell trouble for the euro and indeed the EU if the result goes in favour of Geert Wilders’s Party of Freedom (PVV). Populist Wilders is promising a referendum to leave the EU and his anti-immigrant rhetoric has seen his popularity soar as the far-right gains momentum across Europe. A win for Wilders, now considered a serious candidate, could put Holland on course to leave the Eurozone and the EU.
4.Presidential election in France
The first and second rounds of the French Presidential elections take place on 23rd April and the 7th May respectively. Marine Le Pen, the far-right candidate for the Front National (FN) is doing well in the polls. According to the latest IFOP poll she has 25% of the vote in the first ballot and is expected to easily make it to the second round. In a recent quote on Bloomberg, Le Pen stated her desire to take France out of the Eurozone and re-denominate French government debt in a new national currency – “More and more European citizens realize their economies have been suffocated by the euro,” she stated at a press conference. Could Le Pen win? The French elections are making markets nervous especially when opinion polls for Brexit and the US elections got it so wrong in 2016.
5.Election in Italy
There is the distinct possibility of a general election in Italy this year with some hinting at mid-June as a potential date. Having lost the recent Italian referendum on constitutional reform, Matteo Renzi’s pro-EU, Democratic Party, faces a tough battle from the anti-euro Five-Star Movement (M5S), with both parties neck and neck in recent polls. Beppe Grillo, leader of Five Star Movement is advocating a move to drop the euro. A poll held in December showed 47 percent of Italians considered the euro a “bad thing” for the country; only 41 percent held the opposite view.
6.Federal election in Germany
With Angela Merkel (an advocate of closer European integration) facing criticism over her controversial open migration policy, could Germany see a change at the top come October? Although the anti-immigration, far-right Alternative for Germany (AfD) has made gains since the migrant crisis began, it is widely expected that Mrs Merkel will remain the Chancellor of Germany after the election.
It is sure to be an eventful year in politics throughout Europe and what is certain is that the markets react nervously to uncertainty. The potential of change at the top to some of Europe’s leading economies compounds this uncertainty and as a result savvy investors are hedging against fluctuation in the currency markets. How much volatility to expect depends on the outcome of each of these major political events.
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