Market analysis: Expect more pressure on the pound

While sterling's 2016 weakness would be expected, the economic data from the UK showed resilient growth figures following the vote to leave the European Union. The lag in the data will diminish with the real effects coming into fruition in 2017.

British sterling. Negotiations over the UK leaving the EU are likely to put even more pressure on the currency. Niklas Halle'n / AFP
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In a tumultuous year for the financial markets, 2016 would be best characterised by the political uncertainty that weighed so heavily on market sentiment; by the action or inaction of some of the world's most powerful central bankers and finally by the continued stagnation of the global economy.
Some of the developments of last year will no doubt affect the financial system through this year and beyond.
The momentous Brexit vote in June was one that dominated market sentiment through 2016. The vote led the British currency to tank to multi-decade lows against the US dollar, falling to as low as $1.19 to the pound, and struggled to gain any momentum to close out the year.
While the weakness would be expected in sterling, the economic data from the UK showed resilient growth figures following the vote to leave the European Union. The lag in the data will diminish with the real effects coming into fruition in 2017.
The political uncertainty is also set to mature up to the end of the first quarter, with the formal triggering of Article 50 to take place at the end of March.
Never before has a country left the EU and the terms of Britain's exit will lead to long and drawn-out negotiations. These factors will continue to pile the pressure on the pound through the year.
The pound's low of £0.84 to the dollar will be retested in the first half of the year and thus, those British expats waiting for an ideal level to repatriate may find themselves in a good position to start the year.
If the Brexit vote was not enough, markets had barely any time to pause before attention turned across to the US presidential elections. Campaigning on the back of controversial policy and emerging victorious across a divided electorate, Donald Trump's America will bring with it ambiguity in 2017.
The Trump effect, which gained so much momentum in the aftermath of his victory, has led the US equity markets to rocket to record highs with the Dow within touching distance of the magical 20,000 mark. While it remains to be seen how planned policy versus actual policy pans out – we expect an uptick in the US economy under Mr Trump.
The US was already on the path to solidifying economic growth and the measures promised by Mr Trump will have a positive impact on the US labour market. While markets may go through a correction in January, which is traditionally seen as a hangover month, we expect the bullish momentum to take US markets higher through the first two quarters of this year.
Last year, the Dollar Index, a measure of value of the US currency against a basket of others, broke through 100 level to touch a more than 13-year high. With the US Federal Open Market Committee in the midst of a rate hiking cycle this will continue to lend support to the greenback through the months ahead.
Commodities were mixed throughout 2016; 2017 calls for more of the same. Gold gave up some of its earlier 2016 gains to the end of the year, breaking through several key support levels to consolidate below $1,200 per troy ounce.
The prospects for gold do not look as appealing; expected US dollar strength ahead and inflation expectations will anchor gold and it will remain sluggish going forward. Perhaps the biggest winner in the commodity segment has been crude oil, which ended the year up by 42 per cent.
With the brunt of the Opec reduction action already priced in, expect the West Texas Intermediary contract to continue its consolidation above $50 a barrel with resistance coming in between $60 to $65 in the months ahead.
Guarav Kashyap is the head of futures at Axitrader in Dubai
business@thenational.ae
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