2018 is here and so are some of the first report from Europe, Asia, and North America. With this mind, we thought it might be helpful to look at some general expectations that experts have for this year in terms of the financial markets: what’s going to grow, what would decline, and all that good stuff.
First of all, let’s take a look at Europe. The economy there is growing at a healthy rate, as exemplified by the increasing GDP and wages across the eurozone. Statistics are at a near 10-year high, which shows that the European Union has almost completely recovered from the financial crisis of 2008-2009. The consistently strong economic data has prompted many investors to hope for a hawkish change in the monetary policy of the European Central Bank. Indeed, many analysts have been looking for clues from the ECB that would suggest an end of its stimulus measures for months, though none have come. Inflation still remains lower than the ECB would like it to be, which is why the central bank has stated that its dovish policy would most likely continue until the end of 2018 at least. That is why we don’t expect the euro to succeed in appreciating too much against the USD. We believe it would remain strong but would only be able to make gains passively due to factors pulling down the dollar.
Now, the United States offer a different picture. The US Federal Reserve has been the first major central bank to switch from a dovish to a hawkish policy since the financial crisis. They began increasing interest rates over a year ago, with the most recent hike being in December 2017. The Fed has promised three more rate increases this year, the earliest of which could happen in March, so that is definitely something to look forward to. The Federal Reserve will still have to bear in mind economic data, however, since hiking the rates too quickly will harm the economy. The last reports were a bit disappointing, with rising unemployment and stubborn wage growth. If and when the interest rates are implemented will determine how strong the US dollar will be compared to other currencies. In addition, we should also consider the impact that American politics have on the reserve currency. The investigation into Russia’s involvement in the election of Trump as president is picking up pace – any major shocks in the White House will drag the dollar down.
In terms of the British pound, everything depends on the next stage of Brexit negotiations. The British currency suffered throughout 2016 and most of 2017 due to difficulties in reaching a compromise in the talks with the European Union, at times even suggesting more preliminary elections in the United Kingdom. Nevertheless, the UK government was able to pull through and struck a deal at the very end of the year, which cleared the way for further talks. Once again March is an important month, as that is when we would know more about the progress in Brexit negotiations. If the talks are going well, then the pound will have sufficient ground to stabilize, though it is not realistic to expect it to reach pre-Brexit levels.
The Japanese yen is perhaps the most difficult tool to make predictions on. The Bank of Japan was applying Abenomics, using dovish approaches in order to encourage economic growth and reinvigorate its stagnant economy. However, over the past few years this approach has not yielded much (at least not in the way it has worked for the EU), and now we even heard from the BoJ that they plan to decrease their stimulus package. We are likely to see volatility in pairs with the yen because of these dissonant approaches. Furthermore, we have to bear in mind that the yen is a tool investors tend to turn to in times of trouble, especially if something is going on with the American dollar.
Even more uncertain than the yen appear cryptocurrencies. Bitcoin had an epic year in 2017, appreciating by more than 1000%. 2017 was also when futures on Bitcoin premiered on some exchanges and investors first saw hope that cryptocurrencies might be embraced by the financial markets as a new kind of tradeable securities. So far this hasn’t happened, though. Experts continue to warn about the potential “bubble” of cryptocurrencies, since they are not tied to anything and their real value is nearly impossible to appraise. This more skeptical view even prompted South Korea, a country that was known for its vast interest in cryptocurrencies, to begin working on a law to ban trading with them, as announced earlier this week. It is likely that Bitcoin and its fellow cryptocurrencies would continue to be highly volatile in 2018 as the two warring camps of financial experts continue to argue over these instruments’ place in the world of finance.