After years of relative stability in the Forex markets, volatility has returned in a big way. The shift has been fuelled in recent months by the U.S. Federal Reserve’s December rate hike, the Chinese economic slowdown, and declining global energy prices. As a result, currency valuations have fluctuated erratically in recent weeks. Will the markets stabilize in the first quarter of 2016?
There are a number of macroeconomic factors that are driving market instability, and throughout the first quarter, many of these factors are projected to remain unchanged. Additionally, the year’s first quarter will also see a number of central bank announcements that will likely have an effect on the markets. As you begin to adjust your strategy for the first quarter, here are a few factors to watch:
US Federal Reserve March Meeting
At the end of last year, the Fed increased U.S. interest rates by a quarter percent, and said they were projecting four quarter-percent increases to come in 2016. Yet, inflation is moving slowly toward the Fed’s 2-percent benchmark, the financial markets have been unstable so far this year, and several U.S. economic indicators have come in below projections. In other words, four rate increases seem unlikely this year. Future traders are only predicting two quarter-percent increases, and some are speculating that if the U.S. economy remains unstable, the Fed may have to reverse its rates before the end of the year. For Forex traders, this will be a factor to closely watch. Increasing rates would lead to a stronger U.S. dollar, but if the Fed does not increase rates or is forced to reverse course, the dollar’s value would likely weaken.
Oil and Commodity Prices
Oil prices declined throughout 2015 and into 2016, and currently prices are sitting at decade-plus lows. The 75-percent decline in prices has negatively impacted the Canadian dollar, a net oil exporter. Additionally, thanks in part to a slowdown in China’s economic growth, commodity prices have also declined sharply. The price of gold, which fell roughly 10 percent in 2015, and iron ore, which declined 40 percent in 2015, are affecting the values of net exporters of these commodities like Australia. If oil and other commodity prices do not rebound in Q1 2016, the Canadian and Australian dollars will likely fail to gain momentum in the first quarter. Forex traders should closely watch economic developments in China in 2016. If the Chinese economy begins to improve, commodity prices would likely see positive gains.
European Central Bank Action in Q1
The Eurozone has experienced sluggish growth compared to the US and UK. Currently, inflation in the EU has remained far below projections, and investor confidence has declined worldwide following the Chinese slowdown. As a result, some analysts have projected the ECB may expand their quantitative easing program in the first quarter of 2016. The ECB meets in this month and in March. If ECB officials expand the QE program, the euro could slide further against the USD and GBP.