Expected interest rates from the members of the FED (central bank US)
2016 was a historical year in many ways. In politics, the UK choose to leave the EU and the US picked an unexpected candidate (Trump) as the next US president. In trading, the EUR/USD saw its sharpest decline in more than 10 years (since March 2003).
Logically, investors and traders are asking themselves what the impact could be on the financial markets such as Forex, commodities and stock indices.
As the global economy continues to struggle, will the trends of 2016, such as USD strength, anti-trade/globalisation and anti-establishment, continue to develop in the next trading year of 2017?
Today's article discusses our financial and Forex forecast 2017 from a technical analysis point of view mixed with a few major fundamental aspects.
Feel free to take part in the discussion by posting your comments, questions and opinions in the comments section below.
US Dollar bullish trend
The US Dollar (USD) is expected to remain strong in 2017. Technical analysis shows a clear bullish trend on the USD, with the EUR/USD trending down and the USD/JPY moving higher.
From a fundamental point of view, the US economy is moving forward as well with the current unemployment rate at 4.6%, although the recovery remains fragile as mixed signals still persist. A Trump presidency could, however, add momentum with increased fiscal and government, reduced regulations and newly planned tax cuts for individuals and companies in 2017.
Well-implemented policies could boost the US economy, inflation, interest rates (see image for FED path) and hence the USD in 2017. The downside could be an increase of US debt plus difficulty for creditors to repay their debts (higher interest rates), which might impact the markets in 2018 or later.
The EUR/USD monthly chart shows three bearish monthly candles (red box) in a row and a new lower low as well. The bearish breakout seems prepared for a continuation of the bearish momentum (orange 34 moving average) towards parity (green) and Fibonacci targets (purple levels).
One key confirmation failed to appear last month (December 2016) when price did not close near the monthly candle low and the support of the Keltner indicator (purple) from the MT4 Supreme Edition. Therefore a retracement (blue arrow) of the previous monthly candle till the half way (38.2%–50%) or to test the previous high seems possible.
All in all, the EUR/USD should fall towards (orange arrows) the parity level at 1.00 (green) in the first quarter of 2017. A break below parity could see further bearish extensions towards the -27.2% Fibonacci target 0.95 (red arrow).
Whether the EUR/USD can make more bearish gains (dark red arrows) is difficult to say now and will depend on both economic and monetary decisions of both eurozone and the US in 2017. Ultimately, the price will find a support level and make a bullish bounce at support (green).
Source: USD/JPY Daily chart MT4
USD/JPY uptrend and USD/RUB potential opportunity
One of the items of contention is whether the US and EU Sanctions on Russia will remain in place. The wild card that has come to light that may influence a change in stance on this matter is Trump's appointment as the President of the USA.
Trump has indicated that he thinks of Putin as a strong leader, and I expect closer ties between Moscow and Washington in the coming year.
In addition, EU Sanctions on Russia can be revoked in the absence of unanimous decision to keep the sanctions in place by EU member states. Following recent elections in Bulgaria, an EU member state, a Pro-Russian Prime Minister won the elections, and this may place the EU Sanctions unanimous decision under pressure.
Should the sanctions be lifted, this will immediately cause an upward revaluation of the RUB, so you might place it on the radar.
Our personal Forex forecast 2017 for the USD/JPY during the first 6 months goes within the range of 123.20-114.95 with 118.10-121.60 mid-term. Keep in mind that 116.10-00 is a strong support zone. We expect the USD/JPY to be one best Forex pairs to trade 2017.
Euro (EUR) and Euro zone struggle
With the US economy at full employment, we are perhaps in the beginning of the credit-tightening cycle in the US. As the EU zone unemployment remains stubbornly high, it seems that the ECB will continue its QE through to the end of the year before there is any hint of tightening.
After Trump's presidential inauguration in January 2017, we must keep an eye on the tone from the US Fed to see if this changes under his term despite their independence from the US Government. Given the monetary policy divergence, we should see a move towards parity, but this should be a strong support level.
Our personal forecast for the EUR/USD pair during the first 6 months in 2017 goes within the range of 1.0875–1.0150, with 1.0520 being an important s/r level.
Source: EUR/USD Daily chart MT4
Best MT4 indicators 2017?
There are numerous tools in the Forex market that traders use each day. But at this point, we haven't seen anything as powerful as Admiral Markets MT4 Supreme Edition and VPS (volatility protection settings). We talking not about Expert Advisors that trade different strategies, but rather a set of tools that make your trading easier and much more joyful.
As you know, MT4 is an open platform that can be enhanced with custom indicators and Expert Advisors. However, individual traders and users are left alone to find out what is available across the web, and configuring all these extra features could be very time-consuming and too technically demanding for some.
That is where MT4 Supreme shines.
It is a user-friendly and easy-to-use addon for existing MT4 and is packed with tons of different and useful features. Our favourite is Correlation Table – which is in the core of perhaps the best Forex strategy in 2017.
The Correlation Table
Source: AM Supreme Edition MT4 Correlation Table
Being a relatively new Forex indicator, the Correlation Table shows ranges from -100 to +100, where -100 represents currencies moving in opposite directions (negative correlation) and +100 represents currencies moving in the same direction.
The correlation in Admiral Markets MT4 Supreme Edition is colour-coded. Red colour indicates extremely strong correlation, orange indicates strong, and blue indicates neutral correlation. Meanwhile, green colour indicates weak or no correlation.
By using correlations, you ensure that you stay out of positions that will cancel each other out.
Opening two positions on inversely correlated pairs such as EUR/USD and USD/CHF is pointless unless you plan to hedge your trades. Also, by using correlation table you keep yourself away from double exposure in a single currency pair.
Another useful tool that we recommend is VPS that has been extensively covered in Italian referendum article. Volatility Protection tool can really save you from trouble when market goes awry.
Is S&P 500 uptrend running out of steam?
The S&P 500 and Dow Jones rally have both managed to keep their uptrend intact. In fact, December 2016 showed a record month with fresh higher highs.
The uptrend of the S&P 500, however, has been fueled by an expansionary monetary policy of the US central bank (FED), which kept the interest rate at a historical low for almost a decade. The FED also introduced multiple Quantitative Easing (QE) programs to help the US economy withstand the 2008 economic recession and its aftermath.
Research has shown that the QE policy was the main contributor to the S&P rally (see image above). Past S&P 500 expansions were greatly fueled by company earnings (blue fields), but the most recent uptrend was highly impacted by the FED (green fields).
The main questions are:
How will interest rate hikes (tighter monetary policy) impact the US stock markets?
Could the S&P 500 run out of steam once the main driver of the market (FED) cools down its actions?
Other research shows that the S&P movement is correlated with the level of US interest rate:
- when interest rates are lower than 5%, rate hikes mostly generate S&P gains as well
- when rates are above 5%, rate hikes tend to lead to S&P 500 losses.
With the above image in mind, the answer to the main questions is that the S&P 500 will probably continue with its uptrend. But be on the lookout for the following developments:
- pullbacks when the FED increases the interest rate, especially if multiple rate hikes occur in a short period of time
- the US economy slows down suddenly and inflation rate starts to slump.
Why are these two trends a danger to a bullish stock market?
As the FED steps out of the spotlight, the S&P 500 will have to be supported by actual earnings and earning growth:
- a weaker than expected US economy could damage that perspective and hurt the S&P 500
- a stronger than expected US economy could also hurt the S&P 500 especially if rate hikes move quickly
- a steady pace would seem to give the S&P 500 the best bullish perspective in 2017
- in 2018, it will be critical to see how much the US debt increases (in relationship to the economic growth) and what kind of potential risk it has on the US economy.
Cheers and safe trading,
Nenad and Chris