Yearly review 2017

2017 was a volatile year for sterling, what does 2018 hold?

Previous Day's Market Highlights

2017 was a volatile year for sterling, which hit lows in January ahead of a Brexit speech by Theresa May, only to rally after she struck a conciliatory tone. This reaction to Brexit headlines and expectations would prove to be a theme throughout the year, as markets weighed the progress of often-times contentious negotiations and the odds of a hard Brexit—or even of no deal at all.
The odds of the latter became less likely in the final part of the year after the UK and EU struck a divorce deal ahead of the year’s final EU Summit. Another key driver for the pound was speculation of a rate hike, which came to fruition in November when the Bank of England increased rates to 0.50% from 0.25%.
The euro benefited in 2017 as markets speculated that a strengthening economy, reduced risks of deflation, and diminished political risk would lead to monetary policy normalisation. The ECB kept interest rates on hold at 0.0% and in December reduced monthly QE purchases from €60B to €30B a month from December 2017 until September 2018.
For the dollar, both politics and monetary policy were in play as well. The Trump administration’s tax reform was a key driver, with the dollar fluctuating as its passage seemed more or less likely. Heightened tensions with North Korea were initially a threat to the dollar’s strength, but as investors adjusted to the developments, the dollar became more inured to the threat.
GBP/USD ended the year up over 9%, having held above 1.30 since early September, marking a strong recovery from January lows below 1.20. GBP/EUR ended the year down nearly 4%, but this nevertheless marked a turnaround from August lows below 1.08. EUR/USD gained over 14% to end the year above 1.19, around some of its highest levels since January 2015.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP / EUR 1.1250 1.1509 1.1133 3.27%
GBP / USD 1.3536 1.3550 1.3220 2.44%
EUR / USD 1.2032 1.2034 1.1717 2.63%
GBP/AUD 1.7278 1.7999 1.7363 3.53%
GBP / NZD 1.9012 1.9836 1.9029 4.07%
GBP / CAD 1.6963 1.7468 1.6920 3.14%

Today's Market Highlights

Several of these themes are set to continue in 2018. Brexit negotiations will remain a threat to the pound’s strength given the risk of contention and delays, while support for the pound could stem from signs of progress in negotiations or from speculation of a second BoE rate hike in the latter part of 2018. However, the gradual pace of any additional rate hikes will limit the pound’s upside.
For the dollar, gains from tax reform were priced in in 2017, but politics will remain in focus with midterm elections in November. The main driver this year will be the path of monetary policy under new Fed Chair Powell, particularly whether the number of hikes deviates from the Fed’s projected three (market expectations are for only two so may be surprised by a third). More hawkish policy in other countries may, however, cap the dollar’s gains.
The ECB is likely to keep interest rates on hold in 2018, but if the economy continues to strengthen and the ECB further tapers QE, the euro may strengthen in anticipation of normalising monetary policy. Political risk could come back into play around Italian elections in the spring, mainly if there is a strong risk of populist parties coming into power.
As for today’s calendar, 2018 releases kick off with Manufacturing PMI figures from the Eurozone, the UK, Canada, and the US (09:00, 09:30, 14:30, 14:45 GMT).

Today's Economic Calendar

Time Currency Release Consensus Previous
09:00 EUR Eurozone Final Manufacturing PMI 60.6 60.6
09:30 GBP Manufacturing PMI 58.0 58.2
14:45 USD Final Manufacturing PMI 55.0 55.0