USD: Hitting record highs on firmer labor market and GDP growth

With the US election behind us and the December Federal Reserve meeting just ahead, the dollar is trading at its strongest levels against other world currencies in 14 years. Investors have been bullish on the greenback as the latest economic data continues to show steady GDP growth and a firmer labor market, with November’s job report showing the lowest unemployment rate since the financial crisis. Many are also optimistic that 2017 will bring increased federal spending and market-friendly tax reforms under a Trump presidency and Republican Congress.

Looking ahead through the end of this year, the big events to watch are the Federal Reserve meetings on December 13th and 14th. Markets are currently factoring in a 95% chance that the Fed will raise interest rates at the meeting, which has been fueling the dollar’s rise. But if the Fed decides to delay raising interest rates until next year – perhaps because wage growth may still be too low to boost inflation — that could signal a pessimistic outlook for the US economy and reverse some of the dollar’s recent gains.

EUR: Still resilient, but maybe not remarkable enough to outshine the dollar

The euro is down to 20-month-lows against the US dollar as the Eurozone’s economic resilience continues to be outshined by bullish prospects for the US economy.

From now until 2017, the euro could continue its steady slide against a relentlessly rising US dollar unless we see faster growth in Europe (or if the US economy unexpectedly halts its progress). And if the European Central Bank decides to boost its existing stimulus spending at its meeting on December 15th, the euro’s value could fall faster.

GBP: Promising economic results begin to overcome 2017 Brexit uncertainty

The pound is starting to recover from its multi-decade lows (the pound recently neared $1.20) as investors see more positive economic data and listen less to the uncertainty around the official Article 50 Brexit event set for March 2017. Last month’s manufacturing and construction sector reports both showed stronger-than-expected growth, while UK retail sales grew nearly four times faster month-over-month than analysts had forecast for October (November’s retail sales come out in mid-December). Investors are also buoyed by Brexit Secretary David Davis’ recent comments that the UK would consider making contributions to the EU to secure access to the single market, which alleviates some of the economic trade concerns around Brexit.

This month, look to the Bank of England’s December 15th meeting. While most analysts expect the central bank to hold interest rates steady given the recently positive economic news, a surprise interest rate cut or increase in stimulus spending announcement could stop the pound’s recent recovery. The pound could also trend lower if the UK’s growth slows and/or if the US dollar continues to strengthen.

CAD and AUD: Commodity currencies rally with spike in oil, coal, and iron ore prices

The Canadian dollar is beginning to rebound from its March lows against the US dollar largely thanks to rallying oil prices spurred by the first OPEC production cut since 2008. The loonie has also received a boost from stronger-than-expected job growth and rising raw and industrial good prices. Looking ahead, the Bank of Canada is expected to keep interest rates unchanged at its meeting on December 7th, so the loonie may continue to mostly follow oil prices through the end of the month.

The Australian dollar is also starting to recover from its June-lows against the greenback largely as iron ore and coal prices have risen to their highest levels in months. That said, the Aussie dollar could begin to slide if US interest rates begin to rise, as a stronger US dollar could hurt commodity prices and the Aussie dollar by extension.

Thanks for reading this month’s global market outlook by World First USA, Inc. Be sure to check out next month’s update to stay informed on how the latest world events and economic data affect the currency exchange markets.