The trade war between the US and China, Brexit and the whole European political landscape were some of the major events that marked the year. At the end of 2018, these events will leave us in an undefined state, as they are still awaiting their conclusions.
To begin with, the Dollar had a somewhat troubled start of the year – and it is still in rebound from Trump’s new policies of 2017. The currency depreciated until February of almost 6 percent against the Euro, and its index depreciated at the same time, just over 5 percent. Its recovery began later in March and it then initiated the Commercial War with China, where Trump imposed rates of 50B.
But the main reason for the recovery was also the continuation by the EDF of raising the benchmark interest rate. On March 21 it increased from 1.50 percent to 1.75 percent, thus starting the first of four rate increases from 1.50 percent to 2.50 percent in December 2018. This was the time of the strongest recovery of the dollar from -4.6 percent at the end of to 1.70 percent at the end of May, on the Dollar index, and consequent recovery against the Euro, which went from 5.6 percent to close to -2.8 percent.
All of this is also due to the large improvement in the state of the US economy which peaked in some sectors which had not seen such changes since the 1970s. At the moment we have the lowest unemployment rate in the last 30 years at 3.7 percent, with the product gross domestic product at 3.5 percent, despite having already been at 4.2 percent this year. This also leads to an improvement in the inflation rate, which despite being higher than in January’s 2.1 percent, now stands at 2.2 percent, which is lower than the rate in June, which was 2.9 percent and very close to 2 percent market ideas. All this shows us that this is the economy with the greatest recovery of 2018, but also raises the question of whether it will have the strength to continue like this.
Jerome Powell, governor of the Fed, has already shown that he wants to continue to increase rates by at least another 2 times in 2019, indicating that it expects the economy to remain strong and stable. The Dollar thus ends 2018 with an appreciation being the index, at the moment, to 3.5 percent with the price of 96.56, and in the EUR/USD to -3.66 percent, with the price to 1.1424.
The Pound was the largest depreciation currency within the Majors. Brexit continues to negatively influence the currency which, despite the excellent start of the year, ends with a sharp drop. Starting the strong year, the Pound index appreciates to almost 7 percent until February, even breaking the value, if only for a short time in May. This was due to the fact that the British economy is recovering too, showing a marked improvement in GDP and also a drop in the unemployment rate. At this point, Brexit would be controlled with all deadlines already set. A demonstration of the good momentum of the UK economy is the rise in the interest rate by the Bank of England which passed on 2 August from 0.50 percent to 0.75 percent.
Even at this point the Pound already depreciated strongly against all the problems that Brexit was beginning to raise, namely the agreement with the European Union that seemed quite difficult. This prompted the market to see Mark Carney’s rate rise an inappropriate measure which led the pound to depreciate to near -5 percent in mid-August, a 12 percentage point drop from the year’s high. When it was hoped that it could not get any worse, and even after Theresa May had reached an agreement with the EU, the British Parliament did not approve this agreement, raising major problems for the United Kingdom. At the moment there is a great lack of definition as to what will happen and all scenarios are possible. A new referendum, elections, new agreement (the most difficult of all) and an exit without an agreement. This makes the Pound the currency which will probably be the hardest to analyze in 2019 and the future does not seem easy at all. The Pound’s index ended the year depreciating by -5.40 percent despite having already been down (-6.92 percent) and depreciating by -5.2 percent against the Dollar, is in the price of 1.2660 at the moment.
The Euro had a somewhat similar behavior to the Pound. It started the year off very well but is ending in depreciation. The strong appreciation of the Dollar in the face of Brexit’s problems, as well as the political problems experienced in Europe, has greatly devalued the Euro, which thus reaches the end of the year with the index depreciating at -5.38 percent so far. Despite economic growth, which is also visible in the eurozone with an inflation rate at 1.9 percent and the unemployment rate at 8.1 percent – which has only been lower in 2008 – the Euro fell during this year.
Mario Draghi goes on to say that it is too early to change monetary policies, only finalizing during the month of December the APP (asset purchase program) that began in 2014 and maintaining the benchmark rate at 0.00 percent. Draghi has warned that he does not expect changes in 2019. In political terms, Europe is going through great revolutions with the problems now experienced in France and the confrontation between Italy and Brussels apparently already solved. The future is therefore also uncertain for the Euro and we will have to wait for the beginning of 2019 to know what might happen.
Last note for the other majors that are ending the year is the depreciation compared to the beginning of 2018 with the Canadian Dollar index at -7.24 percent, the Australian at -9.46 percent and New Zealand at -5.19 percent at this time, thus revealing all majors during 2018 expects the US Dollar.
This article was written by Dercio Pires
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This article was originally posted on FX Empire
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