Risks for global FX market in 2018

There is a number of risks behind the general view of US Dollar appreciation driven by the gradual interest rate increases by the Federal Reserve. Given the recent broad-based US Dollar weakness driven by the slide in 10-year Treasury yields, the main risk to expected US Dollar strength in the first quarter of 2018 is disinflation.

Lack of inflationary pressures or at least inflation crawling up toward the 2% inflation target is likely to derail swift interest rate increases by Federal Reserve. While foreign exchange market counts with three to four interest rate hikes by Fed in 2018, with no inflation such path may soon be reversed undermining the US Dollar strength.

The US Dollar strength might be driven by the corporate profit repatriation under new tax policy, but in combination with slower interest rate increases, the US Dollar might still get a punch lower.

Among geopolitical risks stemming from elections in countries like Italy, the global economy and financial markets might get a hit from other, unintended actions like central banks policy mistakes or interventions or negative externalities like China’s sudden deleveraging going beyond the current scope of expectations slowing the economic growth with global implications.

On the political scene, the general rise of populist political parties, especially in countries of Central Europe poses risk for broader and deeper integration driven by Germany and France.
The main forex market risks in 2018:

1. Faster or Slower interest rate increases by Federal Reserve compared to one rate hike per quarter expected now.
2. The political risk with Republicans losing in the US mid-term elections.
3. Deep correction in the US equity markets combined with credit valuations repricing.
4. Sudden US or the Eurozone inflation relapse prompting central banks to hike rates beyond scope of current expectations.
5. The Bank of Japan ending its QE.
6. Major central bank policy mistakes or interventions (including ECB’s verbal intervention against strong EUR).
7. China de-leveraging, trade disputes, armed conflict.
8. Externalities including wars, terrorist acts or other military conflicts in the developed world.
9. The rise of populism and anti-EU or anti-Euro policies in countries of the Eurozone, including a separatist movement in northern Spain and northern Italy.