Currency markets end 2016 on a quiet note, brace for a packed political calendar in 2017

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3 January 2017

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

FX markets were for the most part quiet during the holiday weeks. The only exception was a short-lived pop in the Euro on 30 December.

A
mostly inconsequential short term move was brought about by automated algorithmic trading and again extremely thin liquidity during Asian trading hours exacerbated by the holiday calendar. Aside from that we saw more meaningful upward moves in the Swedish Krona and South African Rand.

We are expecting currency markets to be driven in 2017 more by political events than monetary policy or economic factors, which makes forecasting an unusually difficult task. Elections in Europe, the fleshing out of Donald Trump’s policy proposals in the US, and the timing and management of the Brexit process in the UK are the key events to watch.

More immediately, the economic calendar returns this week from its Holiday break. Here are the major currencies highlights and what to expect.

Major currencies in detail

GBP

The PMI business confidence indicators for manufacturing, services and construction will be released this week. A continuation of the steady upward move we have seen since the post-referendum collapse would certainly lend some support to Sterling.

EUR

The Eurozone calendar is dominated by the flash estimate for December inflation, to be released on Wednesday morning. Markets are expecting core inflation to print at exactly the same level of the past four months at 0.8% year-on-year. It will be interesting to see if the recent worldwide trend of modestly higher inflation prints is replicated in the Eurozone and we could therefore see an upward surprise.

USD

Like the first week of every month, possibly the world’s most important economic data point is released by the Bureau of Labor Statistics on Friday, the US labour report. Consensus expects yet another headline number of just under 200,000 jobs created in December and some a slight rebound in the unemployment rate from the massive drop seen in November.

The key in our view will be the rate of wage increases. If, as the consensus expects, we recover the entire drop seen in November that will give ammunition to the hawks in the Federal Reserve that are looking at no fewer than three rate interest rate hikes this year, which would no doubt continue to support the US Dollar in 2017.

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