2017 FX Outlook – the pound, the euro and the US dollar

2016 was a year full of market surprises and shocks. The pound made some drastic losses, the euro limped along, while the US dollar ended the year stronger than ever. With a new year coming up and a new US President in the White House, let’s look at what 2017 might have in store for currency traders.

UK Pound GBP

The cable (GBP/USD) had a good start to 2016 at $1.4716 and had a smooth first six months of the year. As the Brexit referendum approached the sterling fell $1.42 at the beginning of June. On June 23, before the vote, the cable soared 0.9% hitting a year high at $1.4877. However, as the day came to a close and an unexpected result of ‘yes’ to leaving the European Union became manifest the pound spiraled hitting a 30-year low against the US dollar, and famously losing more in one day than almost any other currency in the last 40 years. The cable fell to $1.3228, the lowest it’s been since 1975. The Bank of England added further pressure to the pound as it dropped interest rates to a record low of 0.25% in attempts to bolster the UK economy. Pound weakness continued losing a further 19% and hitting a low of $1.2123 on 11 October. The Sterling finished the year a little more positively having gained somewhat against the euro and the dollar. On Friday the GBP/USD ended the trading session at 1.2343 whereas the EUR/GBP ended the session at 0.85216. The pound has the dubious honour of being the second worst performing currency of the year after the Mexican peso.

Predictions for 2017 are relatively bleak for the pound as fears around the Brexit persist. Though some analysts are more hopeful stating that as long as it’s not a ‘hard’ Brexit, the pound might continue to grow.

Euro (EUR)

Though the GBP was the big loser in 2016, the euro also had a terrible year hitting a 13 year low of $1.0353 on 20 December. Political uncertainty is leading many to expect parity against the US dollar in 2017. Current euro weakness is in contrast to the highs it saw in May of this year of $1.1534. A strong US dollar is partly to blame following the Feds interest rate hike in December. With a divergence in monetary policy between the Fed and European Central Bank (ECB), some analysts are expecting more euro weakness for 2017. After populist votes came out of the UK and Italian referendums all eyes will turn to the elections in 2017 of The Netherlands, France and Germany, three founding members of the EU. As the three biggest players in the common market, analysts are expecting a lot of tension and volatility. However, these three countries have a much healthier poorest to richest income spread than either the UK or US which were key issues to their referendum and election campaigns.

Aside from Greece, all other EU countries saw growth in 2016 with the Eurozone growing 1.8%, higher than the US 1.6%. 2017 will hold more pressures for the common currency, the euro, as the Brexit plays out and the third installment of the Greek bailout is made. Both Russia and Turkey are sensitive topics to the European financial picture, as are anti-trade comments coming out of the US. 2017 is looking like a critical year for Europe’s future.

US dollar (USD)

The dollar had a good 2016 especially after the November election and continued to shine in December as the Federal Reserve raised interest rates for the first time in 12 months by 0.25%. Comments from the Fed are indicating another three hikes for 2017 which should be great news for the USD, however, they made similar comments after the December 2015 hike but 2016 only saw one manifest by the end of it. Consumer confidence and the overall economic picture is looking rosy for the greenback. And with diverging monetary policy amongst central banks, with most others still keeping a loose hold on the reigns, the USD should be in for a positive 2017.

If President-elect Trump comes through on his campaign promises of increased infrastructural spend and tax cuts then we may see euro-dollar not just hit parity but even dip beneath it, something not seen since 2002.




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