After an initial wobble, the pound closed Monday’s session on a steady footing as Theresa May presented her Brexit ‘Plan B’ to Parliament.
Despite this though, economic news and data trends continued to play a big part in some of this year’s biggest currency movements.
So what were the biggest market movements of 2018? And what can this tell us about what is most likely to move the major currencies in 2019?
The pound (GBP) – Brexit, Brexit and more Brexit
GBP/EUR – Ended the year lower
GBP/USD – Lost 16 cents in 2018
If you thought the pound would be tired of reacting to Brexit news after 2016 and 2017, 2018 proved you wrong.
The pound spent most of the year falling against the other majors as UK-EU Brexit negotiations rumbled on, and markets continued to digest the reality that Brexit was approaching.
Concerns that the UK could leave the EU without any kind of Brexit deal also worsened throughout the year as negotiation deadlocks persisted in Brussels while disagreements mounted domestically. This caused fissures within the UK government which further concerned investors.
While Brexit uncertainties were one of the primary causes of pound weakness this year, the most significant period of movement for the pound was a series of losses between April and August – when multiple factors weighed on the currency.
Following optimism surrounding bets that the Bank of England (BoE) was preparing for a modest UK interest rate hike cycle, surprisingly disappointing UK growth data in April doused those expectations.
As the BoE didn’t hike UK interest rates in May, the pound had drifted to fresh lows by August. Brexit jitters weakened UK economic activity and kept the Bank of England cautious. Even a July interest rate hike from the BoE didn’t do the pound much good as the central bank implied that there wouldn’t be a second adjustment for some time.
In December the pound struggled in reaction to PM Theresa May’s decision to delay the parliamentary vote on Brexit and the subsequent vote of no confidence.
With March 2019 marking the UK’s exit from the EU, Brexit developments are likely to keep the pound on its toes for the first quarter of the year.
The date for the parliamentary vote on the Brexit deal is set for 15 January. If the deal is rejected, the odds of a no-deal Brexit would rise and could send Sterling tumbling.
The euro (EUR) – Slowing Eurozone growth in the spotlight
EUR/USD – Falls 11 cents in 2018
EUR/GBP – Recovered from lows of £0.86 to close the year at £0.89
Similarly to the pound, the euro also recorded a sustained run of losses between April and August in 2018, as signs of a Eurozone economic slowdown came into focus and a controversial and unpredictable populist coalition government came into power in Italy.
Earlier in the year, the euro had been supported by the Eurozone’s strong economic activity throughout 2017, as well as speculation that the European Central Bank (ECB) could hike interest rates sooner than expected.
However, as Eurozone data began to weaken in the middle of the year, the bank announced it would not hike interest rates until late 2019 at the earliest, and support for the Euro disintegrated.
The Eurozone’s economic outlook worsened as the year progressed and a budget stand-off between Italy and the EU also took a toll.
Of course, broad strength in the common currency’s biggest trading partner (the US dollar) for much of 2018 also had an impact on the euro.
So what’s next for the euro? There’s still speculation that the ECB could hike interest rates in late 2019 or early 2020, but concerns that global growth is slowing remain, and lasting US trade protectionism is not helping that.
Eurozone manufacturing has already been impacted by US protectionism, and if the Eurozone economy shows no signs of rebounding any time soon the euro is unlikely to strengthen much either.
Another flare up of tensions between Italy’s new populist government and the EU could also inspire euro volatility.
However, if global trade jitters lighten or the US dollar falls back, the euro may find its feet again as the year continues.
US dollar (USD) – Will the 2018 rally continue?
USD/GBP – Stormed from 0.69 to 0.80
USD/EUR – Up almost ten cents from 2018 lows
While the euro and pound had a testing 2018, it was a very different story for the US dollar, with the currency steadily strengthening against the majors over the course of the year.
One of the biggest stories of the year for markets was certainly US President Donald Trump’s fiery protectionist rhetoric on US trade, and the resulting tit-for-tat between the US and China.
The escalating trade tensions between the US and China reduced demand for higher-risk assets for the first half of the year and bolstered the US dollar.
The US dollar also benefited as the Federal Reserve hiked interest rates four times.
However, some analysts now believe that the US dollar’s winning streak is likely to come to an end.
US-China trade relations appear to be improving and further de-escalation will drive investors towards higher-risk currencies.
Investors are also becoming more concerned about slowing growth, both in the US and globally.
The Federal Reserve defied market expectations in December by hinting at further US interest rate hikes in 2019 despite growth fears. This led to concerns that if Fed interest rates rise too high it could actually hurt the US economy.
All-in-all, the US dollar is likely to hold its own against the pound (given all the Brexit-related headwinds) but could start easing back against the other majors.
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