Eurozone 2018: Can Political Stability Lead To Calm In The Currency Markets?

2017 was another year where we saw high fluctuations in the currency markets that came as a direct result of unexpected political events. The dollar, pound and Euro all experienced a roller coaster 12 months in the wake of polls and other unforeseen circumstances across the US and Europe.

In some cases such as the Catalonia question, there are issues that are yet to be resolved but with 2018 promising much less in the way of high-profile national elections and independence votes, can we expect far more stability and a more predictable year for Forex traders as a result?

Schedule

In terms of sheer volume, Europe faces more national polls in 2018 than it did one year ago but many of the results are expected to be formalities and with all due respect to the majority of countries involved, any surprise results are unlikely to have a huge effect on the euro.

Emanuele Canegrati, senior analyst at BP PRIME said:

“We should not expect much volatility in Forex markets due to European national polls in 2018. The most important event will be Italian national election which will be held on March 4th.”

The Czech Republic and Finland start us off in January and then we run through to March where Italy takes centre stage. An upset here could certainly have implications for immediate currency trading in its aftermath and like many of its European counterparts, Italy failed to find an outright ruling party at the last poll in 2013.

The Five Star party, led by Luigi di Maio is the strong favourite to get over the line and actually secure a majority this time but there is potential for a ‘blip’ in the exchanges around the time that Italy goes to the polls on March 4.

Among the many minor events in the first half of the year, the Russian Presidential Election looms much larger. This is due on March 18 and while it’s very mention could be enough to cause a wobble on the exchanges, we’re not exactly expecting a shock.

Betting markets can often put these things into better perspective and current President Vladimir Putin is available at a very short 1/500 to be returned after polling. Once again, some minor fluctuations could come in the currency markets around election time but with Putin back in office, they should quickly settle down.

“As for the UK, it is perfectly possible we could have early elections, should Brexit talks end in a 'no deal' or a very unfavorable (for London) deal. Otherwise, the situation in Germany is solved, as Angela Merkel's CDU and Martin Schultz' SPD reached an agreement to form the Grosse Koalition.” Mr Canegrati concluded.

Second Half

In the second half of 2018, the focus falls on Sweden, Belgium and Azerbaijan and while there is potential for an unpredictable result from any of those three, it’s not likely to compare to the surprise outcomes that we saw in Germany and the UK in 2017.

In those cases, the markets reacted significantly with the pound and the euro suffering sharp falls in the days following the polls but any unexpected result in Sweden, Belgium or Azerbaijan is unlikely to have the same effect.

Unforseen

There is plenty going on in Europe and beyond but as we’ve seen, the sheer volume of the polls is likely to be negated by predictability, leaving little for forex traders to get excited about in 2018.

The issues could lie in events that aren’t scheduled: By their very nature, we don’t know what these will comprise but it’s easy to make assumptions. Firstly, will there be another general election in the UK by the end of the year? While delicate Brexit negotiations continue, the heat is off Theresa May and her minority Conservative government to an extent until their conclusion but isolated calls for the country to go back to the polls remain and they could intensify if by-elections or other factors put pressure on a government with a tenuous grip on the country.

In Germany, unexpected results in the German Federal Elections of 2017 left leader Angela Merkel without an overall majority and some four months later the ruling party has yet to form an effective coalition. In the immediate wake of those September polls, the Euro took a sharp dip against other major currencies around the world and further uncertainty in Germany could spark further falls.

Standing Alone

The period around the Catalonia independence vote also led to uncertain times for the Euro against other major global currencies. That particular issue is ongoing while Europe also faces at least one more poll in 2018.

Residents of New Caledonia will be casting their votes no later than November of this year to decide whether to remain part of France or to set up their own independent state. Opinion polls carried out in April 2017 suggest that the state will not elect to break away but nothing is certain and at the very least there could be a small effect on the Euro around the voting dates.

Beyond that poll, nothing is certain although plenty of speculation exists elsewhere with calls for another Scottish referendum from certain quarters by the end of 2018.

We’ve clearly just focused on Europe here but over in the US, the only certainty is the midterm elections to be held later in the year. The unpredictability of President Donald Trump is grounds for a separate assessment but it could well be another year of intense fluctuations for the dollar against other major currencies.

“Forex markets can be seen as a thermometer of the political and economic situation of a country or macro zone,” said a spokesperson for BP PRIME.

“Analysts and investors are most of the time able to see situation in advance and take their decisions accordingly. At the end, what matters to investors is the return on their invested money. Political and economic instability mean negative returns to them and investors sell those activities which may generate a negative return.

“They don’t want to lose money. In Forex markets, where investors invest on currencies, they buy currencies of countries which grant a stable political and economic environment, which is the basis for economic prosperity and welfare. Otherwise, they tend to sell currencies of those countries whose future is uncertain, as in the case of Brexit or Scotland referendum.

“The Catalonia situation is almost the same, as secession would have been read by markets as the possible begin of the EU break-up. After all, many times investors bet on probabilities, rather than certainties. That’s why often they change their investment direction as a consequence of a change in these probabilities.”

In summary, the polls that have been confirmed for 2018 should be calm affairs, leading to ruling parties being returned and little in the way of shock outcomes.

The question, as always, lies in the future that is unknown. Much of this is pure speculation but that’s what forex trading is all about and once again, we could be in for a fascinating and turbulent 12 months.