Happy New Year one and all. No doubt New Year’s resolutions will have been made and broken already by some. However, comfort yourself in the fact you’re intelligent enough to know that wearing Lycra is never a good option in January, or indeed any other time of the year.
So, what does 2016 hold in the currency markets? Expect continued confusion from Central Bankers on the timing of further rate increases. To quote the former Federal Reserve Chairman, Alan Greenspan, “I’ve learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said”.
The big political question of 2016 will be the possibility of a ‘Brexit’. Do I think Britain will hand back their membership to the European Union? No. Do I think it will cause downside risks to Sterling from the end of Q2 onwards? Most likely. It seems David Cameron would like a summer vote on EU membership. I think it will follow the Scottish referendum in that the uncertainty will weigh on Sterling although when push comes to shove the status quo will remain.
We were of the opinion in 2015 that we would finish under 1.50 on GBP/USD and that proved to be correct. We forecasted 1.32 end of year on GBP/EUR and we finished in the 1.34’s. Compared with other forecasts of plus 1.40 from various Banks we weren’t far off. What’s our thoughts for 2016?
· GBP/USD will target 1.35 to the downside. The range will be for the most part from 1.35 – 1.50
· GBP/EUR will target 1.30 to the downside and the upper limit will be 1.40
If you are a USD buyer how does 1.35 affect you? If you have an exposure for Q1 it may be an idea to utilise a forward contract at current levels to mitigate your currency risk. Please contact myself or one of the trading team at Aston to discuss implementing a Forward Contract. If you are a USD seller I would implement market orders at staggered levels to the downside to execute at. Please contact me to discuss appropriate levels to aim for in Q1.
The US are likely to raise rates a further four times this year after their December move. Will the UK follow suit? Perhaps, and at a push it will be one rate hike in Q4. With inflation expected to remain low I think the Bank of England and the MPC (Monetary Policy Committee) will remain cautious.
The UK should continue on the long road to recovery and we should see a reduction in the current account deficit along with the unemployment rate. However, I feel, once again, the US Dollar will be strong again this year.
If you are EUR buyer you should look at placing market orders to the upside to take advantage of any intraday spikes on GBP/EUR. Should you be looking at 1.40 as achievable? Nope. I would look at anything above 1.35 this year as good value. If you are a EUR seller I would look at covering off some of your exposure on SPOT to take advantage of the move to the downside over the past couple of weeks. Please contact myself or one of the trading team to execute a transaction.
We have some figures out in the first week of 2016 in the form of inflation data from the Eurozone tomorrow, FOMC minutes out of the US on Wednesday, the ECB Monetary policy meeting on Thursday and the main event of the week, Non-Farm Payrolls released on Friday. These releases should create volatility on the majors.
Next week we will have a better feel for the landscape in all things from China to Oil, the Saudi/Iran situation to name a few and how all of this will contribute to the likely movements in the currency markets.
If you have any questions please do let me know.
Have a great week.
Written by Liam Alexander