2018: Five questions for the markets

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With the New Year and a new trading week ahead and economic releases in full swing, traders will have little time to get over the holiday hangover. As the New Year has already dawned upon us, the year ahead will see quite a few questions being asked. Orbex has five questions for the markets in 2018.

Has the era of easy monetary policy finally run its course across the G7 economies? What can traders expect for the year ahead? What impact could it have on the currency markets? Here are the top five questions that traders will most likely ask.

We focus on the main markets that include the United states, the Eurozone and the UK.

USD: Tax reforms, interest rates

President Trump finally managed to push through with his tax cut proposal just in time before Christmas. The tax cuts are expected to increase spending and also allow corporate businesses to repatriate the money parked overseas.

We already saw a glimpse of the result of the tax cuts with AT&T announcing that it would give more than 200,000 U.S. union members a tax bonus of $1000. It was the first corporate to react after the tax reforms were passed into law. Furthermore, the company announced that it would invest close to $1 billion in the U.S. additionally.

The Fed on its part has also acknowledged that the tax cuts could put more spending power in the U.S. consumers, driving growth; albeit, the fact that the tax cuts does take a toll on the exchequer.

The central bank was also optimistic for the year ahead as it signaled three rate hikes during 2018. Although inflation remains weak, the tax cuts could help boost consumer prices at least over the year.

With U.S. interest rates now standing at 1.50% alongside the Fed’s balance sheet normalization program, we could expect to see the U.S. dollar coming into favor.

EUR: Steady as she goes

The euro surprised the markets last year. From being the weakest currency, the euro managed to surge to levels of $1.20. This came amid speculation of the ECB starting to unwind its balance sheet program, which it did.

However, officials at the European Central Bank remain cautious. Inflation showed signs of rising before easing back. This explains the ECB’s decision to keep the QE running until September 2018. Consumer prices will remain central to policy decisions among the ECB officials.

Growth momentum has firmed in the region and this is expected to continue in 2018, leaving inflation as the last piece to the puzzle.

Although ECB’s interest rates are not expected to be hiked, the end of QE this year could mark the start of the path towards policy normalization in the Eurozone, nearly a decade after the 2008 global financial crisis and other regional cracks brought the economic bloc almost to its knees.

GBP: Brexit and the BoE

The Brexit saga is unlikely to end any time soon. Although there has been significant progress in the talks, the final deal is unlikely to come anytime soon. The uncertainty will no doubt keep the GBP volatile.

For the moment, the prospects of a hard Brexit seem to be abating but anything could change over the course of next year. Amid the Brexit uncertainty, the Bank of England remains in the eye of the storm.

The central bank is optimistic that inflation will ease by the end of the first quarter in 2018. This could potentially help the central bank to maintain a steady course.

Further rate could potentially diminish whatever growth there is left in Britain. The BoE has however cautioned that rates could rise if inflation continues to remain persistently near the 3% threshold.

While it difficult to predict, traders can expect to see a lot of surprises as far as the euro, the U.S. dollar and the British pound is concerned.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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