The threat of political risks becoming dominant market themes in 2017 could be eventuated by the pending elections in Europe, ongoing Brexit woes, and rising Trump uncertainties. A major risk that continues to reverberate across the board is the unknown over how Donald Trump may lead the US economy while elections in Europe where Eurosceptic parties could gain ground may destabilize the unity of the Eurozone. Brexit developments have placed the Sterling on a chaotic ride with the rising uncertainty ahead of the article 50 invoke in March that is likely to spark renewed rounds of selling. With political themes gaining traction and almost dictating market movements, the instances where politicians have lashed out at central banks have had lasting effects. A political heavy market could become the new norm in 2017 especially when factoring the cocktail of political risks brewing in Europe, the United States, and Asia and the Middle East.
The main attraction today will be Donald Trump’s inauguration ceremony which could spark extreme levels of volatility across the board. Markets may pay very close attention to the President-Elect inauguration speech for further clarity on the proposed fiscal stimulus measures. With investor anxiety set to heighten as the ceremony looms, the Dollar could become sensitive. Technical traders may observe how the Dollar Index reacts to the 101.00 level with uncertainty encouraging bears to send the Dollar Index lower towards 100.00.
Sterling remains gripped by Brexit
The Sterling/Dollar staged an incredible rebound after Prime Minister Theresa May promised a parliamentary vote on Britain’s deal to leave the EU which suggested that she had accepted that the pro-EU parliament would be involved in the negotiations. While Sterling’s resurgence was impressive, there is a threat of upside gains becoming limited in the future as investors re-evaluate the ramifications of a hard Brexit to the UK economy. Uncertainty still remains a key theme when dealing with Sterling in the medium term to longer term with currency likely to come under renewed selling pressure as anxiety heightens ahead of the article 50 invoke in March.
Although there remains a possibility of Dollar weakness from the Trump uncertainties elevating the GBPUSD higher in the short term, the overall trajectory remains skewed to the downside. Technical traders may observe how the GBPUSD reacts to the pivotal 1.2350 level which could provide some direction. While the GBPUSD rising towards 1.2500 in the short term on the back of the UK government putting the final Brexit deal to parliament is a possibility, more punishments could be expected in the coming months if complications arise from the Brexit negotiations.
Gold buoyed by uncertainty
The heightened political risks across the globe and uncertainty over how Trump’s policies may impact the US economy simply triggered risk aversion this week which consequently elevated Gold. The metal’s trajectory is slowly tilting to the upside with Dollar weakness encouraging bullish investors to install heavy rounds of buying. With uncertainty likely to mount ahead of Donald Trump’s inauguration on Friday, investors may flock to safe-haven investments and should propel Gold prices higher. While the prospects of higher US rates in 2017 remains a theme that can cap gains on Gold in the medium to longer term, further short term gains may be captured as uncertainty prevails. Technical Gold traders may observe how prices react to the pivotal $1210 level. A decisive breakout and daily close above $1210 could trigger a further incline higher towards $1230.
Currency spotlight – AUDUSD
A vulnerable Dollar has been the engine behind the AUDUSD explosive gains in the first trading weeks of the New Year with bulls exploiting the upside momentum to install heavy rounds of buying. While the appreciations have made the AUD a strong performer amongst majors, it has more to do with external factors and technicals rather than the Australian economy. The recent rise in demand for Aussie commodities such as Iron and Copper also attributed to the upsurge that saw prices glide to monthly highs.
Although there is a possibility of the AUDUSD edging higher if the Dollar continues to depreciate, gains could be limited in the medium term in the event of US-China trade relations suffering. It must be kept in mind that a potential slowdown in China which relies heavily on exports to the United States may impact Australia that exports over 40% of goods to China. From a technical standpoint, the AUDUSD could edge higher on the daily charts with previous resistance at 0.7500 acting as a dynamic support which could open a path towards 0.7700.
Commodity spotlight – WTI
WTI Crude sprung into gains during early trading on Friday by speculations of diminishing supply amid the production cut and reports of rising Chinese demand. While oil markets may experience further boosts from the optimism over lower supply, the threat of OPEC and Non-OPEC members cutting supply as proposed still weighs on sentiment. It still remains too early to gauge the impacts of the supply cut with any appreciations in prices seen as speculative boosts. From a technical standpoint, WTI Crude has found comfort in a wide range with prices frequently trading between $54 and $50. Dollar weakness could send WTI Crude back towards $53 in the shorter term.