Exchange Rate Forecasts 2017: Lloyds Bank

Lloyds Bank have released their revised foreign exchange forecasts following Donald Trump's win of the US Presidency - here is where they see the major foreign exchange pairs heading in 2017. 

The Euro is tipped to struggle while the commodity Dollars also face mixed fortunes against a US Dollar that is expected to maintain a bullish bias in 2017.

Pound Sterling will see mixed fortunes against the Euro and Dollar as recent strong UK economic data and prospects of inflation rising above target next year have led Lloyds to remove their erstwhile call for a further cut in Bank rate.

Most importantly though we get Lloyds’s first insights into how the elevation of Donald Trump to US President could sway the foreign exchange landscape.

Here are some of the key views and the forecast table:

GBP/USD

Near-term, uncertainty over the outcome of the government’s challenge to the High Court’s ruling on Article 50 and the prospect of a US rate hike are likely to keep GBP/USD around current levels.

We forecast 1.24 for end-2016. Further out, uncertainty around both the nature of the UK’s negotiations with the EU and the impact of the new US administration on the US economy suggest that GBP/USD will remain vulnerable to significant bouts of volatility over the coming year.

GBP/EUR

Our monetary policy outlooks for the respective central banks suggest there may be additional
upside to GBP/EUR. Given the robust economic data in the UK and shift in tone from MPC members, we no longer expect further easing from the BoE.

In contrast, with euro area inflation likely to remain below the 2% target for the foreseeable future, we anticipate the ECB extending its asset purchase programme for a further six months, out to September 2017.

Shifts in short-term sentiment around both EUR and GBP leave the cross vulnerable to heightened volatility. But, in the medium term, we expect the pair to drift higher towards 1.21 by end-2017.

EUR/USD

Comments from various Fed officials have suggested that the election result has done little to
change their view on the economy, which has helped the market-implied probability of a December rate hike rise above 90%, supporting a further slide in EUR/USD below 1.07.

While we believe the Fed remains on track to tighten policy next month, we suspect that the ECB in contrast is still minded to loosen policy and extend its QE programme beyond next March.

Moreover, the Italian constitutional referendum scheduled for 4 December, alongside elections in France and Germany next year, remains a source of downside risk for the euro. Based on these factors, we expect EUR/USD to end the year around 1.07 and drift lower over the course of 2017.

Australian Dollar

The country continues to benefit from a stable political environment, comparatively high
yield relative to other advanced economies and a positive shift in the commodity price cycle – when combined, these make Australia an attractive destination for foreign inflows, although the country’s AAA credit rating may be at risk if the government’s fiscal position deteriorates further.

Recent data has been relatively firm - inflation came in above expectations at 1.3% y/y, the unemployment rate remained at 5.6% and the trade deficit narrowed even further to A$1.2bn. Meanwhile, at its October meeting the RBA left interest rates unchanged at 1.50%, and given the balance of risks are likely to remain on hold for the foreseeable future.

Nevertheless, despite the uncertainty around the economic impact of Donald Trump’s potential policy agenda, the estimated probability of US monetary policy tightening has actually increased since he was announced as President-elect. Our base case remains for a rise of 25bp in December. Consequently, conflicting forces are likely to leave AUD/USD confined to a range - we forecast the pair to reach 0.77 by year-end and 0.78 by end-2017.

Canadian Dollar

USD/CAD continues to trade in an ascending channel, which has been in place
since early-June. In the last month, having been as low as 1.30, the currency pair has gained strong upward momentum, rallying above 1.35.

Heightened expectations that the US Federal Reserve will raise interest rates by 25bp at its December meeting, in spite of the uncertainty related to the US election result, have been constructive for the USD.

In contrast, Trump’s agenda – specifically the potential for protectionist policies – is of concern to the Canadian economy, given the significance of the US as a trade partner. USD/CAD has been further buoyed by the decline in oil prices, which now sit around 13% below their October highs.

In this backdrop, the OPEC meeting on 30 November is of even greater importance given the current impasse for key oil producers with regard to individual country quotas. Meanwhile, Canadian data has been mixed. While G DP growth and inflation came in as expected, both retail sales and the change in full-time employment were negative.

At its October policy meeting, the BOC left interest rates unchanged but adopted an easing bias. Against this backdrop, the risk is for a further weakening of CAD. However, we feel the latest rally is corrective and forecast USD/CAD to edge lower towards 1.34 by year-end and 1.31 by end-2017.

New Zealand Dollar

After briefly rallying above 0.74, shortly before the US election, NZD/USD has traded lower
following Trump’s ascension to President-elect and the RBNZ’s decision to cut interest rates by 25bps to1.75%.

Despite relatively anchored inflation expectations, the central bank’s bias has turned neutral.

Following the rate announcement, Governor Wheeler suggested in his subsequent statement that further easing is not necessary at this stage - astance that may be appropriate given the economy’s recent performance.

Q3 inflation was higher than anticipated, the unemployment rate unexpectedly fell to 4.9% and milk prices ($3317/tonne) rose to their highest levels since mid-2014.However, despite the strong domestic outlook, the currency faces a number of downside risks. The USD has gained momentum as the probability of a 25bp rate hike from the Federal Reserve in December rose above 90%.

In addition, further comments from RBNZ officials - highlighting their concerns around the strength of NZD and open mindedness on FX intervention - act as a warning to the market. Given the prevailing conditions, we expect a moderate decline in NZD/USD towards 0.70by end-2016.