The pound’s fate has been tied to Brexit throughout 2018. Even additional influences, such as economic data and Bank of England forecasts seemed to carry the undercurrent of the UK’s departure from the EU. The press seized on every new announcement and piece of speculation and the market followed suit. There are signs that that issue looks set to dominate the direction of sterling in 2019. The date of the UK’s departure is the 29th March but with so much to be agreed during the transition period, it looks unlikely that the concerns will melt away after the deadline.
In March, Theresa May spoke about Brexit, addressing very few industry concerns but warning of compromises ahead and the pound fell against the euro. It rose briefly on the news that a transition deal between the UK and EU has been agreed. There has been a lot of focus on Theresa May’s statements this year; as the figurehead of Brexit each announcement and setback has been under scrutiny and often this came to the detriment of the pound.
While much of the coverage of the impact of Brexit has been focused on the negative, positive statements from the Bank of England (BoE) MPC committee allowed the pound to make gains against the euro and the dollar. The BoE has been scrutinising the possible effects of Brexit; a stress test carried out towards the end of the year showed the UK’s banks would survive any possible iteration of Brexit, including a no-deal scenario, but warned of a possible recession in some instances. The market appears to recognise just how thoroughly the BoE is examining the potential impact of the UK’s departure from the EU and responds to both positive and negative statements from the MPC and Governor Mark Carney.
Political in-fighting has also characterised this year and the many splits within the ruling Conservative Party have put a few dents in the pound throughout the year. In July, Boris Johnson resigned from the Cabinet over concerns about the government’s direction for Brexit and the pound fell after the Foreign Secretary’s departure. Johnson was not willing to simply walk away; in September he criticised the ill-fated Chequers proposal over Brexit in his Telegraph column and other Conservative politicians joined the chorus to voice their concerns; in the face of such ardent criticism the market struggled to retain any optimism for the pound.
Towards the end of the year, there were further fluctuations following another raft of resignations over Brexit. However, Theresa May forged ahead and reached agreement with EU leaders and this caused the pound to rise. As the year draws to a close, all eyes are on the vote in parliament on whatever form the Brexit deal is set to take. If the proposal is voted down, the UK may be in for even more uncertainty in the new year and the pound may remain volatile until greater clarity is reached. If it looks as if Brexit is going ahead on schedule, the pound may benefit from a small measure of certainty, although the bigger picture suggests it’s unlikely to be plain sailing in 2019.
As growth momentum slows across the Eurozone and a more uncertain picture of world trade is starting to emerge, the euro had some difficulties this year. The ECB remain cautiously optimistic and announced plans to transition out of the current quantitative easing programme. It seemed like whatever the euro tried to do to hold steady, there was a slightly gloomier picture presented for the future than has been seen for the euro in recent years.
At the beginning of the year, the euro fell by an average of 0.4% against a dozen of the most actively traded currencies despite above forecast €Z ecostats for January. Looking back, it almost seems as if the market must have a crystal ball; growth slowed throughout the year across the Eurozone. The ECB took a largely pragmatic line, acknowledging the change but highlighting it was a slowing of momentum rather than significant losses, but it was clear that there were changes afoot on the world stage that would impact the euro.
In April, the euro had a tricky time when core consumer prices fell 0.7% across Europe and the matter of Italy’s borrowing costs added to the euro’s woes. The matter of the Italian budget rumbled on for the rest of the year. The EU voiced their concern over the levels of debt faced by the Italian government, who in turn refused to back down from their plans. There were signs towards the end of the year that a potential end to the détente may be in sight, with Italy acknowledging the concerns, but the issue cast a cloud over the central currency for most of 2018.
It wasn’t all bad news for the euro. In June, an agreement between EU leaders on migration – which has become a hot topic on the global scene in recent years – gave the euro a boost. The meeting of the European Council yielded some positive results as they looked to move forward in the new geo-political landscape and their approach was considered positive for the euro.
By the end of the summer, other issues took gold. August’s ecostats showed a clear loss of momentum in the Eurozone economy. By this point, the US-China trade war was in full swing and experts were starting to look at the knock-on effects for global trade. The additional tariffs between the US and Turkey were also cause for concern.
Despite a challenging first half of the year and many unresolved issues including the Italian budget, Brexit and the US-China trade war, it seemed like Europe was determined not to remain on the back foot. The more decisive approach benefited the euro, particularly after Jean-Claude Juncker called upon the European Union to champion the euro as a global currency to rival the dollar and demanded more powers for Brussels to flex its muscles on the world stage. The European Central Bank’s (ECB) statement in October showed that it intended to hold its course despite a change in outlook. ECB President Mario Draghi played down concerns stating, “We’re talking about weaker momentum, not a downturn.”
While Europe seems intent on holding its nerve through a period of change, it’s clear that there may be some choppy water ahead. In November, German Chancellor Angela Merkel announced that she would not seek re-election and the euro dipped in the face of the new uncertainty. Merkel has been a sustained presence in Germany and the EU and any change from this stability may make the markets nervous.
The dollar is well supported by US economic growth momentum and a number of interest rate hikes from the Federal Reserve. Despite overall strength, there have been some bumps in the road for the greenback. The key issues have been domestic politics and the escalating trade war with China, which may not have directly hurt the dollar in a significant way, but the uncertainty around the situation has certainly complicated things for the greenback.
The beginning of the year was a tumultuous time in the US and following the special investigation, accusations were flying which caused the dollar to struggle. Special Counsel Robert Mueller charged 13 Russians with interfering in the 2016 presidential election. In addition, Paul Manafort was indicted with five federal criminal charges and President Trump's former deputy campaign manager, Rick Gates, admitted charges of conspiracy and lying to investigators in a plea deal. The investigation continued throughout the year, and appears not to have reached a final conclusion although some sentences have been carried out.
The US-China trade war, which dominated the headlines and caused ripples across the currency market, began in March with the US announcing 25% tariffs on steel and 10% on aluminium imports. The Dow Jones and the dollar fell on the news and China retaliated, which led to a series of escalations throughout the year with more and more products added to the lists of both countries. The end of the year brought some hope of resolution to the tensions after the leaders of the US and China met at the G20 summit and suggested that an agreement was in sight. However, both presidents presented a different view of the discussions and without clarity, the issue looks set to rumble on into 2019.
After threatening all-out war with North Korea on twitter in January, President Trump met with the Supreme Leader of North Korea, Kim Kong-un in June. The meeting, which took place in Singapore, was a historic first and the dollar rose on the news. It had been struggling due to the escalating US-China trade war rhetoric and tariffs and the meeting presented hope not just of agreement with North Korea but the possibility of more diplomacy on the world stage in the future. While the political picture was certainly dramatic in the US, the market didn’t forget to scrutinise the numbers. Although largely positive, weak wage data in July checked the rise of the dollar and was considered something of a canary in the coal mine regarding changes to the economy in the longer term.
In November, the midterm elections the Republicans held on to the Senate but the vote resulted in a House of Representatives with a Democrat majority. Investors had seen it coming and priced in the ‘blue wave’ but the dollar dipped as if in confirmation that current Republican policies may be frustrated in the future. The House has the potential to not only temper or block planned tax cuts and controversial immigration policies, but also gives teeth to the special investigation given that there could be the support for impeachment if the investigation bore this out. The dollar may have had a strong year, but economic trends and the political picture suggest that 2019 may not present quite such a rosy picture and many will have their eyes on the 2020 elections as the next major change for the US.