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MONETARY POLICIES

What to Expect from the Central Banks in 2017

What, Expect, Central Banks, 2017, Monetary Policies, fx trader, forex

What a year 2016 has been for unprecedented events. There are two in particular which stick out in my mind. The first is Brexit and the aftermath of the UK positioning itself to leave the European Union. The 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

The 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.

This uncertainty was reflected in the Bank of England’s December meeting. They opted to keep monetary policy on hold, with all nine members voting to keep rates unchanged. They 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.

USD

The Federal Reserve has recently hiked rates to 0.75%. So the question on a lot of traders’ minds is: can we expect further increases during 2017?

One thing Donald Trump has been short on during his campaign in specific detail. But as someone who anticipated the New York businessman winning November’s election, I’m fairly confident that his domestic spending plans will make further US interest rates more likely in 2017.

But it’s not just my instinct which is giving me this feeling, it’s the behaviour of investors and where they are moving their capital. Since Donald Trump’s election, global bonds have lost over £1 trillion in value during a significant investor sell-off. They’ve started moving their capital into equities, believing that Trump will create a domestic framework which is very pro-business.

Investors think Trump will implement inflationary policies, increasing the chances of interest rates rising. For example, Trump has talked of implementing a substantial spending programme to improve US infrastructure, which will increase the cost of borrowing and potential yield from government bonds.

However, this all depends heavily on the kind of trading arrangements he can secure with partners in North America and beyond. An insular America which starts trade wars could have an adverse impact on US employment and business spending, reducing the likelihood of a rate rise in 2017.

All things considered, I’m expecting the USD to sustain its strength well into 2017.

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