If 2017 taught us anything it’s that making predictions is something of a risky business. That risk, of course, is at the heart of everything that makes the Forex markets so appealing – not to mention potentially risky – to traders from across the world. What marked the last 12 months out as different to the past, to a large degree, was the way in which purely political events could be seen to have a direct and instantly noticeable impact on the status of various currencies. From the slump in the strength of the pound caused by Brexit to the fluctuations of the Euro based upon the electoral performance of that icon of stability, Angela Merkel. Not to mention, of course, the fact that the strength of the dollar sometimes seemed to hinge on the somewhat erratic – to use a kind word – nature of Donal Trumps Twitter feed.
Bearing all of that in mind, it should be stated that any predictions for 2018 are presented with one huge caveat; they depend massively upon outside influences. Will President Trump survive the Russia probe? Will Angela Merkel stabilise her government in Germany? How will Brexit pan out? Given that a single fairly anodyne speech from Theresa May on the topic of Brexit can send the pound higher or lower, even the possibility of any major occurrences around these issues (or a range of other factors) could have a massive impact.
The US Dollar
At the start of 2017, the US dollar index was hovering around the 103.79 mark, which represented a 14 year high, but by the end of the year it had dropped to 93.98, a reduction of 9.45%. Much of this uncertainty was caused by the various noises emanating from the White House and the fact that, for a large chunk of the year, the legislative agenda of tax cuts and deregulation promised by Donald Trump (which had helped to push the dollar up in the first place) seemed impossible to deliver.
Toward the end of the year, however, the Republican Party finally managed to pass a swathe of legislation on tax reform. This in itself, together with the fact that it could herald the delivery of the other promised Trump reforms, helped to push the US dollar index up by more than 1.2% in a single day. Bearing this in mind, the genera prediction for the dollar as 2018 begins has to be positive.
Given that the currency grew strongly throughout most of 2017, a slowing down seems inevitable, whether as a corrective or merely in reaction to the growing strength of the dollar. One of the factors which is likely to herald a decline in the strength of the Euro is the decision by the ECB to continue with an economic stimulus package into 2018. The fact that this is being done despite 2.5% growth in GDP in the third quarter of 2017 and inflation dropping from 1.5% in September to 1.4% in October, has already caused the Euro to weaken, not least because strong economic indicators led many to believe that the stimulus would be withdrawn. The fact that the ECB is playing safe in this manner fosters some fears that they may be sensing more turbulent times ahead.
Everything there is to be said about Sterling has to be viewed through the prism of Brexit. This will be as true through 2018 as it was in 2017. Although the announcement of the triggering of Article 50 in April caused the pound to rally somewhat, this was perhaps based on an assumption that some certainty would now prevail. When it slowly became apparent that any chance of certainty was still much further down the line, the pound began to slip from a high point of 136.5. Given that, as December comes to an end, the cabinet have only just held their first meeting on what they want to achieve via Brexit, it seems likely that the pound will continue to fluctuate at best and decline over the longer term, as the certainty that the world of business demands remains elusive.