2018 is upon us, which means that for many investors the forex market is going to present round after round of fresh trading opportunities. As with every turn of the year, things in 2018 will start slow in the coming days, but given the level of volatility and controversy during 2017, it shouldn’t take long for things to heat up. Helping you get a firm grasp on what’s potentially ahead over the next 12 months, the following is a currency-by-currency breakdown of what’s likely to shape the forex market in 2018.
Bearish shackles bound the GBP during 2017, and there is little confidence that it can flip things around this year. Issues regarding Brexit have moved past the lingering stage, with such now actively weighing down the GBP. The uncertainty of the UK in a post-Brexit world, along with a decelerating economy, compounds the GBP. Yes, the Bank of England’s interest rate shift was an effort to create an upswing for the GBP, but it won’t change many people’s view that the UK is heading into stormy waters during 2018. A Brexit deadline of March 2019 will be looming marge and any trouble the UK faces meeting this will cause further bearish pressure.
US Dollar (USD)
From one political thunderstorm to another, the USD—in spite of steadying economic figures—has been rumbled by issues within Trump’s rocky presidency. The USD is going to be hinging its luck on the how the Fed is likely to tighten over the cycle, with interest rate hikes likely to have a huge impact on performance. That being said, the USD isn’t expected to outperform the EUR, as the Eurozone and US cycles re-converge. Fed hikes may offer short-term relief, but against a gloomy backdrop, the USD is still likely to be pulled down through a negative curve. This has already started with a bearish move to start the year. Any drop in the stock market or further controversy from Donald Trump could really cause the USD problems.
Sitting across from the UK at the Brexit negotiation table, Europe could very well have plenty to shout about during 2018. EUR yields are all set to remain solid given that the Eurozone’s growth momentum remains strong. Expect the ECB (European Central Bank) to showcase plenty of effort regarding the normalisation of monetary policy, which should go on to increase EUR yields further as 2018 progresses. While the Eurozone has its own political issues to face—see Merkel’s weakening position as Germany’s Prime Minister—expect the EUR to maintain long-term value throughout the year.
Canadian Dollar (CAD)
Canada’s noticeably strong economy has showed real signs of slowing during Q4 2017, with this set to continue into 2018 as international developments potentially cause further headwinds for the CAD. Where the CAD shows vulnerability is within the expectations of further interest rate hikes, which pose a notable risk to the economy. Weighing it up against other major currencies, the CAD could be the surprise underperformer during 2018, as its stability has shown signs of wavering. As always the currency will be heavily correlated to commodities and a dip in commodity prices could spell further trouble for CAD.
Japanese Yen (JPY)
The JPY has ridden out its latest election, with the currency remaining largely unscathed heading into 2017. For Prime Minister Abe, the majority win signifies strength in his position; as such it will bolster the Bank of Japan in its accommodative stance. Stabilisation is the call of the day for the JPY during 2018, something that will be under threat as inflation grows, as the yield curve target will likely be adjusted upwards.
Australian Dollar (AUD)
The story of 2017 for the AUD was a positive one, as amidst global political uncertainty, it remained strong and gave forex traders plenty of food for thought, as it were. It should be a case of more of the same during 2018, as the combination of low back-end yields, low inflation, and solid global growth will help the AUD’s cause. Putting it simply, the AUD is going to be a currency to watch as the year unfolds, as its potential is going to become increasingly more prevalent.
New Zealand Dollar (NZD)
As 2017 drew to a close, the NZD saw its performance stall, with political uncertainty rocking the currency following the formation of the new government. Matters aren’t set to see an immediate resolution either, as the new government faces two potential risks moving forward. The RBNZ's mandate changes, via the introduction of an employment component and possibly a rate-setting committee, could be a concern. On top of that, the markets are sure to have concerns about the preservation of the central bank's independence.
XAU ended 2017 on a high, with it jumping off the back of the Fed interest rate hike, but this momentum is set to slow during 2018. The technical picture for XAU is pretty bullish for Q1, as gold should gather support with USD following a negative trajectory. However, with the expected deterioration of geopolitical risks and the stabilisation of the central banks throughout 2018, the need for the safe haven of XAU could drop. This could weigh down gold’s short-term rally, with Goldman Sachs echoing the feeling that XAU’s charge could be brought to a halt over the next six to 12 months.
2017 was rife with instability throughout the forex market, and that is not really set to change during 2018. While there are a few beacons of light to grab onto—see the AUD and NZD—throughout Europe and North America, it’s a case of more of the same. UBS has labelled the USD’s performance in 2018 as "dispersed", as various forecasts predict it to weaken against the EUR. The GBP will also face various rounds of Brexit fallouts, as negotiations are expected to be problematic throughout the year. Looking at the world’s major currencies—as the above has explained—outside a few positives, traders are likely to face further uncertainties across the board.
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