2018 Expectations

The Forex market was full of activities this year as political situations in the U.S, the UK and the rest of Europe affected the price of major currencies. Let us see what the expectation are in 2018.

A strong forecast for Euro despite Brexit and political instability in Germany.

An analyst at NordFX expects the Euro to gain momentum in January next year and beyond. Despite situations such as Brexit, elections in France and German, and the recent tension in Catalonia, the European economy has continued to gain momentum. Their and business activity indices are at long-term highs, thus the steady growth of Euro against the other major currencies.

Analysts of the Dutch Rabobank stated that the EUR/USD is currently undervalued by about 11%, and, therefore, by mid-2018, the pair EUR/USD may rise to the level of 1.25.

BNP Paribas experts, on the other hand, expect a more complex dynamics for the pair. They forecasted that the pair of EUR/USD would fall to $1.15 in the first quarter before growing by the IV quarter of 2018, to $ 1.23. Analysts at Societe Generale believe that the Euro will increase to $1.20 before going down.

Ease in Brexit Negotiations to increase GBP/USD rates.

The pair of GBP/USD on the hand is expected to record further gains in January and beyond. According to most analysts, this move will be supported by the backdrop of easing Brexit risks and stunted US inflation.
Most of the analysts expect the Greenback to either weaken again or flatline which when combined with the strength of Pound, the exchange rate of GBP/USD will increase. The average forecast recorded by the Pound Sterling stood at 1.37 for the end of 2018, a figure that is higher than the current market rate of 1.34.

Analysts at Barclays, BMO Capital Markets, ING and Societe Generale have a unanimous negative view of the prospects of the Greenback next year while ABN Amro, UBS, and Credit Agricole remain neutral.
The analysts revealed that the reason for the lackluster forecast of USD is because of the growth performance in Europe and Asia which will both reduce the relative attractiveness of the currency and other related assets.

Another factor that would play a huge role in the weakness of the dollar is subdued inflation in the US. This is a valid reasoning because traders are waiting for inflation, which in the end affects the value of the currency. Simply put, higher inflation will also lead to higher interest rates.

Georgette Boele, a strategist at Credit Agricole in his research note stated that “a subdued inflation is preventing a sustained medium-term uptrend in the Dollar.”

The U.S yields likely to remain neutral; the UK yields expected to rise.

ABM Amro expects the U.S real yields to either remain neutral next year. Morgan Stanley, however, expects it to be limited. The two banks both forecast that US inflation would actually rise next year and this will negatively affect the additional return on inflation offered by US bonds.

The UK real yields, on the other hand, are expected to increase as inflation in the region falls. The Pound has risen by 8.5% versus the greenback this year, though it is still below the 9.4% recorded pre-referendum.