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The Euro – A stronger Euro is Expected in 2018
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Canadian Dollar – Data Supports the Loonie
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The British Pound – Brexit and BoE will Influence the Sterling
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The US Dollar – New Chairman, New Policy
This is mostly because the Fed was the only major central bank at the time that has started to raise interest rates. The Euro, the Pound, the Australian Dollar, and the Canadian dollar all outperformed the U.S. currency during 2017, with only the Japanese Yen having a less impressive year. The Federal Reserve was on pace to tighten rates 4-times as 2017 commenced, but the central bank was only able to pull the trigger 3-times during the year. The ECB and the BoJ kept monetary policy very accommodative, while the Bank of England joined the normalization party late in the year.
The Euro – A stronger Euro is Expected in 2018
The Eurozone economy is ending 2017 moving in the right direction, at least when judging by PMI readings, with the manufacturing sector accelerating with confidence and the recovery broad-based across countries as well as sectors. GDP is set to be largely unchanged from Q3, the highest in 10-years. Data points to a robust start to 2018, but in the central scenario, growth is expected to level off slightly next year. As a result, the ECB may be missing its best opportunity to start signaling the turn in the cycle, without adding to slowing momentum.
Looking ahead, there are signs, that the annual growth rate has peaked for this part of the cycle. This is partly due to the fact that the output gap is expected to close next year and companies are already running into capacity constraints according to PMI reports, which means inventory declines will detract from overall growth in Q4. Companies remain sufficiently optimistic about the outlook to invest in an expansion of overall capacity and employment.
Unemployment levels have come down and while the ECB continues to argue that underemployment has failed to come down to the same extent since the crisis, the December PMI survey reported that the employment growth was the joint-highest since September 2000. The turn in the cycle has helped the Euro stay relatively buoyed against the dollar and the yen.
Canadian Dollar – Data Supports the Loonie
The Canadian dollar surged early in the year and developed a positive trend that lasted until September. For the majority of the Q4, the greenback has gained traction, despite robust inflation figures from the U.S.’s neighbor to the north. The Canadian economy should see GDP on track for a 2.6% growth rate in Q4 matching the Bank of Canada’s 2.5% estimate. Given the BoC’s focus on the data, such a result would be supportive of expectations for multiple rate hikes next year.