Will 2017 emulate the seismic shifts we experienced in 2016? Will a semblance of reality return to global markets or will everything be as abstract as a Wassily Kandinsky? One thing is for sure - I’ll be glad to hear the back of ‘Brexit means Brexit’.
The UK Prime Minister Theresa May gave her first television interview of 2017 and said there was no ‘muddled thinking’ from the UK Government on ‘Brexit’ in reference to the former Ambassador to the EU, Sir Ivan Rogers. Theresa May said we’re leaving. Are we going to have a so called ‘Hard Brexit’ as we prioritise sovereignty over our trading relationship with the EU? How will things play out? Will it be an orderly or disorderly exit? Until we have commentary from the Prime Minister herself on the finer details then it is all speculation. Speculation and uncertainty do of course add to volatility in the markets.
Sterling has come off this morning against both the EUR and the US Dollar.
What will 2017 look like for the UK? We have Retailers such as Sainsbury’s, Debenhams and M&S releasing figures this week that will give us a snapshot of trading conditions. Consumer confidence has held up relatively well since the referendum although the key question now is will it continue? I would expect the first quarter of this year to be a little gloomier than the end of Q4 ’16. I would expect inflation to start filtering into the economy more and that coupled with wage growth, or lack of, will result in a slowdown of consumer spending on the high streets. Inflation is going to be well above the target rate this year and I’d expect anything from 2.8% - 3% as a headline figure. Inflation will continue to rise due to a weak Sterling and Oil prices that look to be on an upward trajectory. Sterling may well be under pressure this year.
Next question is on interest rates. Will they move higher or lower this year for the UK? Is it possible for a cut from 0.25% to 0.1% if the UK economy weakens substantially after invoking Article 50 at the end of March? Possibly. I don’t think this will occur as I think the cycle and environment for low interest rates is coming to an end. There is only so much cheap money can do to provide a catalyst for an upswing. The US has started the rebalancing of the global economy by increasing interest rates last year. Expectations are for a further two or three rate rises this year in the US. The UK will not want to lag too far behind the US as a wide divergence in rates from the US will set both economies on different paths, and one the UK will not want to go down.
The US will likely go down more of a Fiscal route this year. President elect Trump is largely expected to opt for infrastructure spending coupled with corporate tax breaks for US multinationals to encourage them to keep production in the US. Until Trump takes office then everything is very much open to debate. However, if you look at the automotive industry then it is starting to take place already. Once Trump is in power then that should provide the Federal reserve with more clarityas at present they’re “operating under a cloud of uncertainty” Janet Yellen, the Federal Reserve Chairperson, has said.
Is the US now fully on the road to recovery? What will the US Dollar do this year? You can see the movements last week until this morning on GBP/USD –
I expect the US Dollar to be in the ascendency in Q1 ’17. I would expect GBP/USD to fall below 1.20 by the end of January as discussed towards the end of last year. If you have a requirement to sell USD back to GBP please get in touch with a member of the Aston team and we can discuss a strategy with you to make sure you achieve the best rate of exchange at the best possible time. Feel free to contact me directly.
If you are buying USD from GBP then as painful as it sounds I would lock in some USD on a short dated forward contract out until end of March. I expect the uncertainty surrounding the UK to continue and I would expect a bump up in the US Dollar once Donald Trump enters the Oval office. How will invoking Article 50 play out for the UK? I would expect a short-term move lower and then once the dust settles we’ll see a retracement back higher. We will be in for a large amount of volatility in the next few months as the political and economic landscape enters a new era.
Sterling/Euro? You can see the movements on GBP/EUR last week and into the first trading day of this week below –
Are the ECB following the US lead and moving away from the decade of cheap money? It will be a more drawn out process although they’ve cut their bond purchases from 80 Billion EUR to 60 Billion EUR a month. First step on the way to the ECB raising rates? Possibly although I wouldn’t hold my breath for anything short-term.
We have a fairly quiet calendar this week out of the Eurozone with the only release of note being the German GDP numbers. Where will GBP/EUR go this year? I would expect GBP/EUR to see a sustained shift higher in Q2 this year. Prior to that I think Sterling/Euro will be under pressure due to the ongoing ‘Brexit’ negotiations. Political risks abound for the EU as well as the UK and the US. As last year showed, trying to predict things with any real certainty is extremely difficult. We always operate on the premise of being risk adverse. Currencies may go up, down, sideways or do nothing at all. You can sit back on the side-lines and cross fingers that things may go in the direction you want. They might well do on occasion although they also have the annoying habit of going in the completely opposite direction. As predictable as it is cold in January I am going to say ‘doing nothing is speculating’. Have a plan in place for your currency requirements this year. Have a starting point. We can then build on things from there for you and build a strategy around it. Please do get in touch with a member of the Aston team to discuss your upcoming requirements.
This year has the capacity to be even more turbulent than 2016. It should be fun times ahead!
Have a fantastic week.
Written by Liam Alexander.