FUNDAMENTAL ANALYSIS by Jarratt Davis
FX
What to expect from the central banks in 2017
What a year 2016 has been for unprecedented events. Tere are two in particular which stick out in my mind. Te first is Brexit and the aſtermath of the UK positioning itself to leave the European Union. Te second is the shock election of Donald Trump as the next US President. Both of these events will continue to have an effect on the markets throughout 2017 - so it’s important that traders are familiar with their dynamics and potential implications.
GBP
Te full effect of Brexit has yet to unfold - and early 2017 will very much be dominated by the timing of Article
50 being triggered and the subsequent formal negotiations with the EU.
Tis uncertainty was reflected in the Bank of England’s December meeting. Tey opted to keep monetary policy on hold, with all nine members voting to keep rates unchanged. Tey reiterated that they are willing to act in either direction and that the central bank has limited tolerance for above target inflation. Overall, the Bank of England failed to provide any new surprises, with future policy action highly dependent on developments to both the risk of inflation overshooting 2% and the economic risks which remain following the UK voting to leave the EU.
With the UK economy continuing to show a high degree of resilience following the Brexit vote, expectations for any immediate easing by the Bank of England have now completely diminished.
Furthermore, given the Bank of England’s increasing concerns over inflation, there is currently no clear bias in regards to future monetary policy expectations. Risks to the UK economy clearly remain to the downside with the UK/EU negotiations likely to play a pivotal role once underway in 2017. For this reason the bias for GBP remains to the downside. However, inflation data should be watched very closely and poses a significant risk to my current view.
FX TRADER MAGAZINE January - March 2017 23
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