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2017 looks like it’s going to be an exciting year for forex traders, if the month of January is anything to go by. The US Dollar has been on a roll so far, starting from the time that Americans voted for Donald Trump as President. There are hopes, if not indications, that he will usher in economic conditions reminiscent of the Reagan years when US equities soared 32% during the president’s initial term.
Furthermore, many countries will be releasing their budgets as well as ISM and PMI numbers, giving forex traders plenty of data to work on. In fact, retail investors will be following institutional investors in having an optimistic trading strategy, irrespective of the slight pullback that occurred early in January.
Even so, one does really have to wonder whether a Trump administration will be able to pull off what Reagan’s achieved. There isn’t a lot of clarity concerning his policies, and he hasn’t yet put his team in place. Besides, it has to be admitted that Trump might find it hard to deliver on some of the commitments he made while on the campaign trail.
President Trump’s first three months on the job will, therefore, be scrutinized very carefully to see which direction he will take. If he pushes for aggressive changes to monetary policy then there is a good chance that the rallies will be sustained. However, if he treads cautiously, or doesn’t get the required support from his party then the US Dollar could suffer reversals, with negative consequences for other currencies.
There’s not a lot of time left for Trump to take office, and until then the markets will continue to climb in anticipation of fiscal stimulus and interest rate hikes. Traders, therefore, cannot expect big rallies in GBP/USD or EUR/USD.
The non-farm payroll reports from the US should give some indication of the proposed rate hikes. Both job growth and wage growth are expected to be strong. Interestingly, the stronger greenback hasn’t slowed activity in the service and manufacturing sectors.
There is a lot of speculation that the Euro and US Dollar will achieve parity. In fact, this has a lot to do with developments in Europe even though the currency will inevitably weaken as the Dollar strengthens. This definitely affects the growth outlook. Based upon the European Central Bank’s latest bulletin, inflation is expected to pick up later on in the year. In fact, the Bank Of England shares the same viewpoint. Therefore, job growth can be expected to take place towards the end of the year, albeit at a slower pace than that of the United States.
The Euro is at risk from political factors, especially since a few countries in Europe are going in for elections this year. The ever-present threat of terrorism has also thrown a pall over the political, social, and economic environment in Europe.
The Pound Sterling has been under sustained pressure and has resulted in highest levels in EUR/GBP. There will continue to be many concerns regarding Brexit, especially when the modalities of the divorce from the EU have to be worked out. A soft exit might be ideal but it might be hard to achieve if British hardliners have their way. The British economy will halve its projected growth to 1.1% and investment will be lacklustre since potential investors get nervous during times of political uncertainty. The Sterling will continue to drop in value versus the Euro and US Dollar.
The sharp drop in the value of the Chinese Yuan has negatively affected other currencies, especially those of Australia, New Zealand, and Canada.