For the long-term traders, it’s high time to start considering 2018 now that we’re in the final quarter of 2017. And if so, these are the most exciting currency pairs I can think of.
It may sound like a cliché, asking a currency trader to watch the US dollar, but the forex market hangs on it. Well, at least 80% of it anyway, so we should definitely be watching it. What’s more, 2018 is going to be a lot interesting for the US dollar. Janet Yellen’s term as FED chair ends in February next year, after which the president, Trump, will either keep her on or nominate another.
The US president was at first critical of Yellen, during his campaign, but in a recent interview with the Wall Street Journal, he stated that he liked a low interest policy. This change in attitude could be reflective of his intention to ‘weaken’ the US dollar after he said it was ‘too strong’ to compete. Already, the anticipated rate hikes for this year have been slowing, and we may not see another hike until well into 2018.
So far, the US dollar has been depreciating against the euro, with the latter gaining more than 15% over the former. Strong economic performance in the Eurozone coupled with the ECB’s plan to reduce its QE program have both pushed the euro further. Inflation also rose in the third quarter of the year, but the ECB president is still reluctant to raise interest rates, as core inflation rates remain stable. Furthermore, such a strong euro reduces the chances of a rate hike.
The EUR/USD pair is certainly one to watch because there is so much uncertainty on both sides to make it interesting. If the US dollar continues to depreciate and the euro appreciates, the latter may return to year 2012 levels above 1.20.
The pound has been weaker than the euro through much of 2017, also due to the Eurozone’s stellar economic performance. In the UK, faltering Brexit talks were a major hurt on their currency, along with lower inflation rates. However, the latest inflation reports were higher than expected, finally causing some reprieve on the hurting pound. The central bank’s Monetary Policy Committee (MPC) finally sounded hawkish when it said withdrawal of monetary stimulus would be likely. Meanwhile, the first hurdle to Brexit was overcome when the government passed the withdrawal bill through parliament.
The pound is not out of the woodwork, though, as UK elections in 2018 may increase uncertainty. Meanwhile, the ECB’s intention to cut back on QE and the positive economic performance still keep the euro going strong. This is why Morgan Stanley expect the euro to hit parity with the sterling pound in 2018 for the first time in 18 years. Certainly an interesting currency pair to watch.
The latest statements from the BoE’s MPC have had a very positive impact on the pound’s strength. If the MPC follows through on its intent to tighten monetary policy, then we just might get a rate hike, perhaps even this year. It is very likely to happen, too, looking at the inflation rates being higher than market expectations.
On the other hand, the BoJ is still maintaining a strong dovish stance, refusing to raise interest rates at all. In fact, a majority of BoJ board members still lean dovish, and one exception out of nine calling for even further QE. These contradictory monetary policies are sure to keep this currency pair very exciting to watch in 2018.