The British pound stole the limelight in 2016 with its spectacular ~15% fall, but as we walk into the new year market focus shifts across the English channel to the continent where the potential for disruption now falls.
Eurozone politics present the largest known unknown in 2017, and for those with impending GBP-EUR payments any surprises to the political consensus could result in some big moves.
Here are some of the key events to be aware of.
"Political risk in the coming year will focus on the eurozone, given the elections in some of its key economies: the Netherlands, France and Germany and, possibly, Italy. There is also a pressing need for EU institutions to take decisions to address the population’s primary concerns of immigration and terrorism, ideally through joint budgetary spending on defence," says a note on the matter from HSBC.
French Presidential Election
This is the first Europe-proper event risk of 2017 to watch.
April and May are likely to be tricky times for the Euro exchange rate with France due to vote in a new leader.
Current president Francois Hollande isn’t seeking re-election, and with his popularity fading it would have been unlikely he would have been voted in again even if he had put himself forward.
It could turn out to be a contest between centre-right Republican leader Francois Fillon and the far-right Front National leader Marine Le Pen.
At present, polls are suggesting Fillon is more popular; however, we’ve seen some political surprises this year and if Le Pen were to win, France would be the first democratic Western European state to elect a far-right leader since 1945.
The fallout could cause some market turbulence as speculation continues to grow that European favour is moving away from left-wing parties.
We have reported the prospect of a Le Pen victory as a significant upside risk to the GBP/EUR in 2017 and would suggest that those with impending FX payments ensure they have engaged a specialist currency provider to place relevant buy orders to take advantage of any upside moves.
"With regards to Eurozone political risk premium, the victory of anti-establishment forces compel participants to treat the very busy Eurozone calendar with greater caution, at least until the outcome of French Presidential elections," say ING in a client briefing note seen by Pound Sterling Live.
The second round of the election is scheduled for May 2017.
Triggering of Article 50 and Brexit Negotiations
Sterling has been allowed to climb against the Euro since October when fears concerning Brexit started to fade.
Consensus started to build that the next mover of Sterling would be the actual details that come out of the negotiations with the Eurozone.
With that in mind, March sees the triggering of Article 50 of the Lisbon Treaty which opens the door to the next set of risks to Sterling.
"We believe the broader risks to GBP continue to lie to the downside – at least until the tail-risk of a ‘messy divorce’ has been taken off the table," say ING in an analyst note to clients.
With the UK government looking to keep their negotiating cards close to their chest post the triggering of Article 50, ING suspect the guessing game in markets may continue for a bit longer.
"GBP is likely to bear the brunt of this lack of political transparency, while further uncertainty over the UK’s eventual degree of access to the EU single market could see the emergence of new unaccounted risks," say ING.
Germany’s General Election
Will Angela Merkel be able to hold on to her position after 12 years in office?
Autumn 2017 will see Germany hold general elections. Merkel’s been somewhat of a pillar of stability for German citizens throughout a rocky decade – she was in place for the Global Financial Crisis which hit in 2008-2009, the Eurozone Financial Crisis in 2011-2012, and the 2014-2015 Russia-Ukraine Crisis.
However, during the continuing Migrant Crisis, Merkel has become a little less popular, with some even calling her a soft touch.
This type of opinion has made way for the right-wing populist Alternative for Germany party to gain some support and it appears as if the 2017 election could allow them to win seats in parliament for the first time.
What’s more, if both France and Germany elect new leaders, there’ll be some political instability as they work out a modus vivendi. Post-Brexit referendum, investors will be looking towards any friction between France and Germany which could lead to speculation regarding the stability of the European Union as a whole.
Italian General Election
December saw Italian voters take to the polls to decide whether to accept Prime Minister Matteo Renzi’s plans to reform the constitution. It didn’t go well for Renzi and after the Italian people rejected his suggestion it led to Germany’s foreign minister expressing concern regarding the result and the political stability in Italy and potential endangerment the Euro. These comments prompted Renzi to step down and now consensus is growing that an early 2017 general election should take place.
This political instability has allowed the anti-establishment party Five Star Movement to increase their momentum and have suggested that a referendum on the Euro currency needs to take place.
These political factors are likely to cause massive market movements with such instability on the table – it seems as if 2016 was only the start of political change and that the European Union, Eurozone and the single currency could be in for an interesting 2017.
And Don't Forget - US Inauguration Day
OK, so this is not a Eurozone event but it is nevertheless an event that will have a direct impact on European foreign exchange.
Although Trump has already been voted in, the time around Inauguration Day may cause some market fluctuations. But how does this impact the Euro and other currencies? It’s expected that there will be a number of international tensions.
In the run-up to, and even since the election, we’ve seen some provocative rhetoric from the president elect – especially on social media, as well as comments to suggest a more isolationist foreign policy might be put in place.
If investors in the US Dollar get cold feet at any point, currencies like the Pound and Euro could jump against it.