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Forget about Brexit! (The events that will shake up currency markets in 2018)

business-articlesForget about Brexit! (The events that will shake up currency markets in 2018)
Brexit might be the favourite child of the media these days, but there’s plenty more on the horizon that could cause significant volatility for the currency markets in 2018.

So, what catalysts for exchange rate shifts should you be aware of?

Central Bank interest rate outlooks

Monetary policy decisions were a driving force of exchange rate movement in 2017, and it looks like the same will be true for 2018.

At the moment, the US Federal Reserve is expected to increase interest rates three times over the next 12 months. If, however, the Fed opts to raise rates four times instead, the US dollar could surge.

While the Bank of England (BoE) isn’t forecast to make any adjustments in the year ahead, pound exchange rates could benefit if the policymakers become more hawkish on the subject of higher borrowing costs over the next few months.

Similarly, if inflation in the Eurozone picks up and prompts the European Central Bank (ECB) to start considering tighter monetary policy, EUR exchange rates would be bolstered.

However, dovish outlooks from any of these central banks would be negative for their respective currencies.

Italian general election (4th March)

The Italian ballot will be another edge-of-seat moment for the Eurozone and European Union.

Once again the main question will be whether populist parties will be able to seize power from the old guard, threatening the unity of the European Union and the integrity of the currency bloc.

According to the latest polls, the governing centre-left Democratic Party is currently in third place, behind the anti-establishment five Star movement and an alliance of right-wing parties backed by former Prime Minister Sergio Berlusconi.

There are strong odds that the election will result in a hung parliament, which could leave Italy without a government for some time as the parties involved try to form a coalition.

London School of Economics Professor Lorenzo Codogno stated;

‘I think the real threat for investors is a prolonged period of instability. Italy cannot afford to have no government for a prolonged period of time. If we have no government and maybe new elections, that could trigger some volatility and pressure in the market.’

Russian presidential election (18th March)

Russian President Vladimir Putin has already been in power for 18 years, and is soon to seek another term.
These elections come at a time where the relationship between Europe, Russia and the US seems increasingly fragile.

Troops from several nations, including France and Germany, are currently stationed in Lithuania as part of a Nato mission to protect European borders.

Tensions have further been raised following the US Presidential election in 2016, which led to accusations that the Kremlin had interfered in the balloting. The UK government has also accused Russia of election meddling.

The currency markets may therefore be unsettled by the prospect of another term for Putin, as these political tensions could escalate further.

European general elections

As well as the Italian general election, several other European nations will be holding ballots, including:
  • Hungary
  • Sweden
  • Finland
  • Poland
  • Cyprus
  • Luxembourg

As smaller members of the EU, the results of these votes may not have quite as big an impact upon the currency markets, but they are still likely to cause tremors. Anti-EU and anti-immigrant parties are still threatening the incumbent governments this time round, which could weigh on the euro.

On top of this issue, the outcomes of these elections could cause volatility for the Pound, given that changes of leadership could alter the support or opposition Theresa May faces as she tries to negotiate Brexit (OK, so we said this wasn’t about Brexit, but forgive us a quick aside).

US mid-term elections (6th November)

The mid-term elections this year will be a ferociously fought battle between the Republicans and Democrats: it’s no exaggeration to say that Donald Trump’s presidency itself is at stake here.

The Republican’s current weak majority in the Senate has made it difficult for President Trump to enact many of his campaign pledges.

If the Democrats can seize control of either the Senate or the House of Representatives, they could make it even harder for the current administration to implement its will, and in extreme circumstances they could even impeach the President.

According to highly-respected non-partisan political commentator Amy Walter;

‘A good economy is helpful to the Republicans as it can cut down on some of the headwinds coming at them right now. But, it’s not clear to me that it’s enough to fundamentally alter the way voters see Congress, the Republicans and the President.’

‘If I were a Republican running for Congress, I’d be taking that more seriously than ever.’

It’s not hard to see what political turmoil of his calibre could weigh on the currency markets. The US dollar is likely to weaken on the uncertainty, and potentially on the outcome should the Democrats thrive, as this will threaten Donald Trump’s business friendly tax reforms.

Concerned about the impact of currency market volatility on your business in 2018?

The coming year is bound to hold many surprises for the currency markets; even the events we can anticipate and prepare for could throw a curveball.

Stabilising your cash flow in such a volatile environment will help you protect your bottom line and focus on your long-term goals rather than fighting short-term fires.

This is simple to achieve with our hedging products, such as Forward Contracts and Stop Loss Orders, which can freeze a favourable exchange rate for use in the future or protect you from losses in the event the market weakens.

Talk to one of our hedging experts today to discover how you can shield your bottom line from the inevitable currency market volatility set for 2018.

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