Last Year’s Highlights
2016 was a volatile year for currencies. Sterling fell around 18% against the dollar on Brexit uncertainty, including concerns that the UK would pursue a “hard” Brexit. The pound clawed back some ground as the economy proved more resilient to the vote’s initial impact than feared.
The dollar fluctuated on Trump and Fed speculation, ultimately rallying towards the end of the year as the Fed voted to raise interest rates to 0.75% and on expectations that greater fiscal spending under the Trump administration would increase inflation, leading to higher interest rates. EUR/USD fell below 1.0400 to its lowest levels since 2003.
The euro came under pressure on increased political uncertainty as elections began amidst a wider turn to populism. After expanding monthly purchases to €80B in March, the ECB announced in December that it would reduce the size of monthly purchases from April 2017. Speculation of tapering at times strengthened the euro.
The potential effects of algorithm-driven trading were brought into sharper focus, particularly following October’s flash crash in the pound. Sterling plummeted in the early hours of the Asian trading session, briefly falling to at least $1.1841. On the last trading day of the year, the euro jumped over 1.5% against the dollar in a similar event.
Releases out today include German CPI, UK and US Manufacturing PMI (09:30, 15:00 GMT), and the dairy price index. Other significant releases this week include the UK’s Services and Construction PMI, the Fed’s meeting minutes, and the US’s December jobs report.
Many of 2016’s key events will remain in focus in 2017. The UK is set to trigger Article 50 by the end of March, and the degree of uncertainty will determine the pound’s strength this year. Attention will then turn to the tone of formal Brexit negotiations, particularly those with the EU.
Upcoming European elections and subdued inflation remain risks to the euro’s strength. Monthly asset purchases will be reduced from €80B to €60B from April and will continue through to until at least December.
In the US, attention will be on Trump’s policies, following his inauguration on 20 January, and on the Fed, which is expected to raise interest rates again this year. The Fed signalled in December median expectations of three hikes in 2017