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Posted January 13th, 2016 by Charles Purdy

What’s in line for the currency markets in 2016?

It goes without saying that 2015 was a volatile year for the currency industry, with numerous political and economic events causing significant fluctuations for all major currencies. The ramifications of these are expected to continue throughout 2016 – with a handful of further factors also expected to affect the markets.

Sterling began the year relatively low against its major competitors, as the US dollar flourished thanks to the interest rate hike and investors held negative sentiment around the British currency.

Will the UK be leaving the EU in 2016?
One of the biggest concerns for investors in sterling is the mounting speculation about the UK’s European Union (EU) Referendum, which may well finally take place this year. Prime Minister David Cameron is working hard to ensure a new deal that is favourable towards the UK remaining a member, and next month’s EU Summit is sure to be significant. The result of this Summit is certain to be a factor in whether the country goes to the polls in June as expected, or whether this is delayed until 2017. The ongoing speculation is already affecting the market and we expect this to continue to affect both sterling and the euro throughout 2016 until the situation is further clarified.

Will the UK rise interest rates this year?
For much of 2015, speculation mounted that the Bank of England (BoE) would announce an interest rate hike before the end of year – with some suggesting that this could happen before the US Federal Reserve did so. When the US Federal Reserve did announce this decision at the end of the year, it had already become clear that the BoE would not be following suit in the immediate aftermath. The possibility that they would do so sooner rather than later, however, is still being discussed by investors; should this decision be made, we would expect sterling to follow the same trajectory as the US dollar did – and strengthen against the majority of its competitors. This would be dependent, of course, on whatever else is happening in the markets at that time. Various experts have different ideas on the likelihood and the timing of such a rise, but it does seem unlikely that this will happen until the summer at the earliest.

Will it be easy to predict any changes in European Monetary Policy?
In early December, European Central Bank (ECB) President Mario Draghi was expected to announce an increase to the Quantitative Easing (QE) programme that it had introduced in January 2015, and the euro weakened as investors awaited his words. In the end, Draghi’s announcement was to extend the programme by six months – and the euro significantly strengthened in reflection of his confidence. This inability to predict changes in European Monetary Policy may well have a significant effect on the performance of the euro, and ensure further volatility in the exchange rates.

What effects will November’s US Presidential election have on the currency markets?
The 58th US Presidential election takes place on Tuesday, November 8th 2016, and whatever happens, the country will have a new president by the end of it. As the voting date gets closer, we would expect much fluctuation in the strength of the dollar against its major competitors – particularly given the likelihood that both Republican and Democrat candidates will focus on monetary policy and the maintenance of the world’s largest economy.

Will China’s economic health be able to improve on its 2015 performance?
Stock markets around the world hit a low last August thanks to an economic crisis in China, and this particularly affected commodities currencies such as the Australian, New Zealand and Canadian dollars (among others), as will their US counterpart. While this seemed to even itself out towards the end of the year, concerns have begun to mount again over the health of the world’s second largest

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