The Forex landscape 2015 – What to expect
Stepping into the New Year, the Forex markets will continue to give many trading opportunities with new trends being set. Here’s a brief lowdown on the major currencies and commodities.
Oil: Crude Oil was the surprise of 2014 falling close to 50% in the year and thereby offering a boost to global GDP but at the same time crippling the economies of oil exporting countries. The falling prices also put downward pressure on inflation and thus, for good or bad has allowed for more breathing space for Central Bankers. While geo politics continues to rule the supply side, we could very well expect to see a further slump in Crude oil in the year ahead.
Gold: Gold futures were mostly stable last year after making a yearly high and low at 1391 and 1131 respectively. Gold futures failed to hold its glitter despite few instances of geo-political risks. Looking back last year, Gold prices were seemingly more influenced by the Greenback than anything else and if the current trend continues, a bullish Greenback could well cap any rallies in Gold in the year ahead. But considering the possibility of any ‘Black Swan’ events, Gold futures could just easily push higher as well.
US Dollar: The Greenback enters the New Year on a bullish note, driven by interest rate hike speculation. Although inflation has been a drag on global economies, the market sentiment at this point is shrugging off any downside risks to the US inflation rate, which currently sits at 1.3%, well below the Fed’s target rate of 2%. Inflation in November eased to 1.3%, from 1.7% in October primarily due to fall in energy prices but is expected to be stable. Core inflation rate however has been far more consistent with the latest reading coming out at 1.7%
The markets expect an interest rate hike anywhere between April through June this year. However bear in mind that the Fed has repeatedly said that interest rate hikes would be data dependent. Factors such as inflation rate will play an important role and therefore by default the Oil prices as well, assuming all things being equal including a stable and healthy growth in the labor market including a continued solid GDP growth.
Euro: The Euro looks to 2015 with the prospects of Sovereign Bond purchases staring down on the region. With inflation rate stuck at 0.3% and core inflation at 0.7% and signs of some Eurozone countries such as Spain hitting negative inflation or deflation most recently, the ECB will be eager to revive growth in the region. What is left to be seen is how the ECB will circumvent the legal obstacles and gain a majority consensus on the issue, especially having to convince the Germans.
Besides the economy, political risks also weigh in the region as countries such as Greece, Spain and Portugal head to elections this year.
The Euro’s weakness comes both from the decline in the regions fundamentals along with a bullish Greenback. The decline in EURUSD has been sharp and rapid and could thus risk a short squeeze to the upside, which is a major factor to consider especially for those who are late entrants to riding the downtrend in the EURUSD.
British Pound: The Pound’s fall from grace last year coupled with the uncertainty of the Scottish referendum followed by the drag on inflation has pushed the BoE’s interest rate hikes further down the road. However, the possibility for an interest rate hike is still on the cards, albeit later in the year.
The UK will be heading to polls in May 2015 and therefore the BoE could simply sit on its hands at least until the political situation is a lot clearer. The rise of the UKIP party has thrown a wrench into the UK’s political scenario and could possibly result in a coalition government being set up in the UK, which could further weigh in on the Pound.
The UK’s inflation rate currently sits at 1% while core inflation is at 1.2% it is way off mark from the BoE’s target inflation rate of 2%. UK’s wage growth is also something to bear in mind, which has started to rise. The BoE currently has two dissenters in favor of an earlier rate hike. All said and done, we can expect to see some movement in monetary policy post May 2015.
Japanese Yen: The big question on everyone’s mind is how far the BoJ and Abe will go in terms of reviving inflation in the country especially at a time when the country is battling a technical recession. GDP growth rate has turned negative with -0.5%, while on an annualized basis Japan’s GDP contracted -1.9%. The Yen declined close to -14% in the year amidst diverging monetary policies of the Federal Reserve and the BoJ. With Shinzo Abe winning the snap elections and already announcing a new fiscal stimulus package ahead of regional elections next year, another victory for Abe’s LDP party could see Abenomics push full steam ahead.