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The Euro

The EUR will likely be the most important currency in the world in 2019 and how it, and the central bank that issues it, navigate the next twelve months will be both a symbol and a catalyst for global economic strength or a dark economic period.

Political risk has overshadowed the Eurozone economy since the beginning of 2017 with Brexit and the European Parliamentary elections this year’s risks to watch.

Analysis suggests that the risks from the Italian, and latterly French, discord towards the end of 2018 has been overdone, a near-term deal on the Italian budget is well within reach and likely to see some risk come out of the EUR price as a result.

Similarly, we do not see Brexit ending in a no-deal outcome that damages both the UK and wider EU. As we note in our GBP outlook, there is enough political will on both sides of the Channel to prevent it occurring with the UK likely to postpone the end of the Article 50 period by a few months.

These idiosyncratic factors, whilst important, should lessen in impact as the year goes on to the single currency’s favour.


We forecast that the European Central Bank will raise interest rates in the summer of 2019 with a plan to continue increasing rates and reducing stimulus on a gradual basis that should even out to around one 25bps increase every 6-9 months.

Such a move is contingent on stability in economic data – which is lacking at the moment – and calm financial markets; we expect growth to bounce back in 2019 following a weak year in 2018 although global trade concerns may hurt things at the margin.

With the ECB hiking interest rates and the Fed likely reaching a top in their hiking cycle within the next 12 months that could lead to both EURUSD and EURGBP performing well in 2019.

Market expectations of what will happen to the EUR versus the GBP are below alongside the predictions of the five most accurate forecasters as measured by Bloomberg.

Source: Bloomberg as at 27/12/2018

The British Pound

Brexit is an all-consuming event at the moment and will dominate the pound’s performance through the first two quarters of 2019 at least and, depending on the result, further into the future as well.

Despite the parliamentary ‘games’ of 2018, our central scenario is that a deal between the UK and EU is signed by the end of the Article 50 period and that a no-deal outcome is avoided.

Should we get close to the March 29th deadline, we expect that political and business pressure to avoid a no-deal scenario will see the government postpone the ending of Article 50 to gain more negotiating time.

A deal would naturally be positive for sterling, but the significant chance that the equivalent of a political ‘game of chicken’ to force weak hands to sign a deal, could drive the pound ever lower in the short-term cannot be underestimated.

Similarly, were the unthinkable to happen and the UK left the EU without a deal then the declines for sterling could be quite staggering.

There is, of course, a life beyond Brexit and while sterling would likely react positively to a deal alongside a bounce in investment, growth, consumer spending and the like, we cannot see such an impulse lasting much longer than a couple of quarters.

The drivers of such a situation are very similar to what we will have seen over the course of the Article 50 period – uncertainty over future trading relationships with the EU and other trade partners, mixed economic data and a Bank of England that cannot raise interest rates as it would wish.


In the event of a deal, we expect sterling to rally to 1.18 against the euro before running back towards 1.14 as the exuberance fades with GBPUSD hitting 1.35 and settling around the 1.30 mark. In the event of a no-deal then we could see declines in GBPEUR to 1.05 with GBPUSD dragged to 1.15.

Market expectations of what will happen to the GBP versus the USD are below alongside the predictions of the five most accurate forecasters as measured by Bloomberg.

Source: Bloomberg as at 27/12/18 

The Canadian dollar

2018 was a year of uncertainty for the Canadian dollar, and while the close relationship with the United States is a double-edged sword of both opportunity and pain, 2019 could very easily be a strong year for this currency.

Most of this optimism comes from it being so intrinsically linked with the US economy, which is expected to grow at or above its trend growth level, as well as the knowledge that any upset and disruption to the North American Free Trade Agreement (NAFTA) has likely come in 2018. (Although we must wait on a completion of its successor, the United States–Mexico–Canada Agreement (USMCA)).


The Bank of Canada is set to start raising interest rates in 2019 although both inflation and oil prices – which are expected to rise – will keep both US and Canadian consumption strong.

Market expectations of what will happen to the CAD versus the USD are below alongside the predictions of the five most accurate forecasters as measured by Bloomberg.

Source: Bloomberg as at 27/12/18

The Australian Dollar

Contrary to the widely pessimistic view towards the Australian dollar in 2019, our analysis indicates that the first half of the year could be a volatile couple of quarters but gains for the AUD may come easier from the summer onwards.

The AUD, much like the NZD is exposed to both China and the US’s cycle of increasing interest rates, although the AUD finds itself more exposed courtesy of higher household debt level on a relative basis and by the fact that it is a more liquid currency than its antipodean neighbour.

The stories that drove the volatility in currency markets in 2018 including Chinese growth concerns, US/China trade spats, instability in emerging markets and wider commodity price compression are still expected to have an impact on the movement of the AUD in the coming 12 months.

Chinese demand for steel, and in turn Australian iron ore should remain solid with any demand that had previously been used for exports likely transposed into infrastructure projects. Similarly, natural gas exports should remain strong.

There is the small matter of a general election in Australia this May which will always be enough to keep the AUD under pressure for a month or so although we are not expecting a huge political upset.


The Reserve Bank of Australia will continue to emphasise that interest rate hikes are more likely than cuts and whilst we see no change in rates in Australia for at least a year, an increase in wages will naturally drive expectations and the AUD higher.

We anticipate AUD trading between 0.70 and 0.76 in 2019

Market expectations of what will happen to the AUD versus the USD are below alongside the predictions of the five most accurate forecasters as measured by Bloomberg.

Source: Bloomberg as at 27/12/18

The US Dollar 

It’s difficult to come into the year bullish on the USD following its performance in 2018 that saw it outperform the majority of its competitors.

Four interest rate hikes, the meat of a stimulus package driving growth onwards, a trade policy designed to damage competitors, 2018 was a year wherein the dollar dominated. However, we think that the efficacy of these measures in strengthening the US dollar will come to an end in the coming 12 months and, with it will be the US dollar’s dominance over the majority of the wider currency universe.

Pockets of dollar strength will still be found of course. Against the CNY and other emerging markets, the risks that a slowing-down of global growth and international trade will likely see investors plump for the dollar over local currencies but against others such as the JPY, NOK, SEK and the EUR. We think that the USD’s time in the sun may be up.


As with every forecast, there are caveats and ours focus largely on the low probability event that the Federal Reserve has more tightening to do in 2019. Currently, markets expect a solitary rate hike in 2019 with the Federal Reserve instead looking for three.

Someone has to be wrong. We think both are and look for two hikes – March and June – to top out the Federal Reserve’s current tightening cycle.

Similarly, an increase in trade tensions propagated by the Trump Administration will drag the USD higher at the expense of emerging market and trade focused currencies.

Growth forecasts globally are imbalanced at the moment in favour of the US and against the rest of the world. We think this to be wrong. There is no doubting that a factor in the strength of the US dollar this year has been growth deterioration and disappointment elsewhere in the world.

Our scenario posits that this will come to an end and likely reverse in the coming 12 months. While large gains will be found if these differential reverse, we think that even stabilisation will be enough to knock the dollar off its perch in 2019.

Against the EUR, we expect the USD to rally to 1.22 over the course of 2019.

Market expectations of what will happen to the USD versus the EUR are below alongside the predictions of the five most accurate forecasters as measured by Bloomberg.

Source: Bloomberg as at 27/12/2018