At the end of each year, we look back at the big consensus calls made by the major investment banks at the start of the year and follow up on it. So, read on to see what the big forecasts were at the beginning of 2018 and whether they were accurate.
Brexit – What was the forecast?
One of the main themes that were expected to dominate the currency markets over 2018 was that of Brexit. With the March 2019 exit date moving into the 12-month view over the year, many players were expecting uncertainty around Brexit to weigh on GBP significantly. While the base case scenario was for the UK to agree on a deal, many banks highlighted the difficulties attached to achieving this outcome. The likelihood that negotiations would go down to the wire, elevating investor uncertainty and weighing on GBP.
What did we see?
It seems that the institutional view was on the money with this call. Despite positive developments earlier in the year, Brexit negotiations quickly hit a stalling point around the issue of the Irish border. The problem went on to become a significant roadblock over the year and, along with other aspects of the deal, created a huge political rift. It all culminated in the UK PM suffering a “vote of no confidence” by her own Party after postponing a final parliamentary vote on her Brexit deal at the last minute. Though May won the subsequent secret ballot to remain PM, she is yet to put her Brexit bill before parliament to vote on, and many are bracing themselves for the likelihood of a “no deal” Brexit. Negative news flow over the year has weighed on GBP taking it down from around 1.43 to around 1.25 currently.
Economic momentum in the eurozone gained a solid pace into the final part of 2017 helped by investor confidence hitting its highest level in a decade. Many banks were looking for the eurozone to continue to grow and gather further momentum over 2018, leading to a more hawkish shift from the ECB. Indeed, institutional positioning over the first part of the year saw EUR long exposure built up to record highs. The expectation was that eurozone growth would continue and the ECB would begin signaling a return to policy normalization.
What did we see?
In this instance, it seems the consensus call was partly right and partly wrong. Frustratingly for the ECB and EUR bulls, eurozone economic activity stalled into the middle of the year and began turning sharply lower. Despite the correction in action, which the ECB continued to view as temporary and due to transitory factors, the bank announced that it would be reducing its QE program in October and planned to end it by year-end. The ECB stuck to this plan and scaled back asset purchases in October before announcing an end to QE at its December meeting. However, the bank struck a more dovish tone with Draghi acknowledging that risks are starting to tilt to the downside which, for now, dilutes the likelihood of the ECB moving rates higher before the end of summer 2019, which is the current ECB guidance. EUR bulls were left disappointed over the year as EURUSD slid from around 1.25 to 1.12 currently.
USD To Outperform
The final big consensus call for the year was for US growth to surge. Also, the USD to climb as the Fed stuck to its projections and raised rates three times over the year. The anticipation of a fiscal boost from Trump’s planned tax reform as well as the initial upward impact of Trump’s trade tariffs was forecast to support the US Dollar as US economic activity picked up.
What did we see?
Over the year, US growth has been rising sharply (headlined by a Q2 reading of 4.2%). Annual GDP is now sitting around 3%, well above the 2.5% forecast at the start of the year. Also, we saw the Fed suggesting four hikes instead of three.
Consequently, USD has been the best performing G10 currency of 2017, rising against each major trading counterpart. Furthermore, the USD Index has moved from lows around 88 at the start of the year to highs around 97 currently supported by four rate hikes from the Fed.