2016 has been quite phenomenal for the financial markets as repeatedly unforeseen events sparked frightening levels of volatility across the board. The year started on a shaky footing in January with fears of slowing global economic growth, sending global stocks into an official bear market by February. Uncertainty became a key theme in March consequently placing the safe-haven Gold back in fashion. With optimism fading over the Fed raising US rates in March, the Dollar was vulnerable to extreme loses. Oil price sensitivity intensified greatly in April following the historical “Doha failure” event that miraculously fuelled a bull rally.
The real shocker was in June when the UK voted to leave the European Union which instantly exposed Sterling to extreme losses. With “Brexit” fears dominating the headlines in July, safe-haven assets received another welcome boost and this propelled Gold to fresh two year highs above $1374. The heightened concerns of the Brexit negatively impacting the UK economy prompted the Bank of England to cut UK interest rates to 0.25% in August consequently exposing Sterling to further losses. September was dominated by discussions of central banks running out of ammunition to revive economic growth, while in October attention slowly gravitated to the US presidential elections.
After Donald Trump’s expectation-defying presidential victory in November, the prospects of fiscal stimulus in the New Year propelled the Greenback to 14-year highs, while the “Trump effect” elevated Wall Street to record levels. Early December showed some life after the Federal Reserve gifted the markets a hawkish surprise by not only raising US rates but also adopting an aggressive hiking path for 2017.
The volatile events of 2016 have already left investors rubbing their hands planning for the next big market shakers for 2017. With the Greenback set to dominate amid the prospects of higher US rates, Dollar strength should be a dominant theme for the first quarter of the New Year. Sterling sensitivity may intensify as anxiety mounts ahead of the UK’s European exit negotiations. A situation where the threat of a hard Brexit could grant bearish investors the permission to install renewed rounds of selling onto the Pound.
Oil markets have displayed an incredible rebound this year with the prospects of major oil producers cutting output by roughly 1.8 million barrels a day elevating WTI crude to yearly highs above $54. Attention should be directed towards the OPEC developments in the New Year with the ongoing sensitivity over OPEC and non-OPEC members cutting production potentially leaving oil markets volatile. Any complications in the cut deal or fears that overall production has not declined could encourage bearish investors to attack oil prices.
The political risks in Europe and uncertainty ahead of the French elections have left the Euro extremely vulnerable with discussions of the EURUSD parity dream taking the spotlight. A rising Dollar from the prospects of higher US rates should effectively cap upside gains on the EURUSD. With sentiment already bearish towards the pair, the divergence in monetary policy between the Federal Reserve and European Central Bank could play a key part in future selloffs. Friday’s early morning mystery spike in the EURUSD does not change the bearish view with weakness below 1.050 opening a path lower towards 1.0350.
Although Gold has been the trader’s choice this week amid the thin liquidity and end of year jitters, the metal could find itself under pressure in 2017. While it can be seen that the zero-yielding metal is on target to ending the year 9% higher, gains could be limited in the New Year if the combination of Dollar strength and prospects of higher rates repel investor attraction. While Gold’s current trajectory still points to the downside, a hint of New Year jitters could encourage bullish investors to exploit the current technical bounce. Technical traders could observe how Gold reacts to the light $1175 resistance level which if defends could send prices lower.