2016 started out with the main focus on the U.S. Federal Reserve. It had just raised rates in December 2015 for the first time in 10 years to 0.50%. It
2016 started out with the main focus on the U.S. Federal Reserve. It had just raised rates in December 2015 for the first time in 10 years to 0.50%. It was also forecasting that FOMC members expected rates to be between 1.25% and 1.5% at the end of 2016, or around four rate hikes.
Although the U.S. Dollar is expected to finish the year near a 14-year high, we cannot expect to see the same spectacular gains we’ve seen during the last two months of 2016. This is because there is no guarantee the Fed will raise rates three times in 2017 and Trump will get everything he wants including $1 trillion to rebuild America, tax cuts, new trade deals and some deregulation measures.
The Euro started 2016 with a strong rally that lasted until May. The driving force early in the year was the weaker U.S. Dollar, and the Fed’s reluctance to raise interest rates. As of December 23, the EUR/USD was down 0.0403 for the year or 3.71%.
In 2017, rising U.S. interest rates are expected to continue to exert pressure on the EUR/USD with the market likely to reach 1.0000 or lower, depending on the volatility. Unless the ECB changes policy to extend its program of buying debt, the divergence between the policies of the ECB and the Fed is going to favor the U.S. Dollar.
The British Pound lost 16.64% of its value against the U.S. Dollar in 2016 and 15.51% versus the Euro as the U.K.’s decision to vote itself out of the European Union in June weighed heavily on market expectations for Britain’s economy. This became known as Brexit.
We expect to see more sideways price action in early 2017 but then a pick-up in volatility as we approach the end of March. Due to the uncertainty over the Brexit negotiations and the length of the negotiations, we see further downside pressure emerging with the first downside target zone 1.1700 to 1.1400. This is followed by 1.0520.
The U.S. Dollar lost ground to the Japanese Yen in 2016, but most of that loss occurred between January and June. From July to early November, the USD/JPY consolidated, but since November 9, the Forex pair has gone on a tear. It is likely to finish the year about 2.35% lower, however, the momentum into the end of the year suggests it is going to rally early in 2017.
The USD/JPY is likely to ride the end-of-the-year momentum into 2017 with a possible surge to 125.00 early in the year. This is possible because investors are going to give Trump the benefit of the doubt that his economic proposals will help grow the U.S. economy.
After spending most of the year higher, the Australian Dollar gave back all of its earlier gains to finish the year lower against the U.S. Dollar. As of December 23, the AUD/USD was trading .7174, down 0.0109 or -1.49%.
The downside momentum at the end of the year suggests the selling will continue into 2017. It could accelerate further if problems arise in housing, labor or economic growth. If this is the case then the RBA will be forced to cut rates while the Fed is raising rates, putting further pressure on the Aussie.
The election of Donald Trump as president had a negative effect on two major emerging market currencies – the Chinese Yuan and the Mexican Peso. The USD/CNY closed on December 23 at 6.95292, up 0.38580 or +5.87% and the USD/MXN finished at 20.5881, up 3.4171 or +19.90%.
James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.