'Tug of war between politicians and central bankers might create explosive volatility' - Lukman Otunuga, FXTM

LUKMAN OTUNUGA 
PROFILE
• Current Job: Research Analyst at ForexTime (FXTM)
• Career: Spent two years as a research analyst with international currency broker FXCM prior to joining FXTM. Holds a BSc degree in Economics from the University of Essex and an MSc in Finance from the London School of Business and Finance.

View profile at FXStreet

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency markets.

Politics are dominating the start of the trading year, with Trump and May shifting the market with their remarks. Do you think this political-heavy market will continue all year long?

The threat of political risks becoming dominant market themes in 2017 could be eventuated by the pending elections in Europe, ongoing Brexit woes, and rising Trump uncertainties. A major risk that continues to reverberate across the board is the unknown over how Donald Trump may lead the US economy while elections in Europe where Eurosceptic parties could gain ground may destabilize the unity of the Eurozone. Brexit developments have placed the Sterling on a chaotic ride with the rising uncertainty ahead of the article 50 invoke in March that is likely to spark renewed rounds of selling.

Much attention may be directed to how China reacts to Donald Trump’s aggressive rhetoric while fears of Trump scrapping crucial trade deals have already punished major respective nations. With political themes gaining traction and almost dictating market movements, the instances where politicians have lashed out at central banks have had lasting effects. A political heavy market could become the new norm in 2017 especially when factoring the cocktail of political risks brewing in Europe, the United States, and Asia and the Middle East.

Have the central banks lost their edge on the markets to the politicians?

The repeated instances where leading politicians have questioned the duty of central banks and even in some situations blamed them for the economic woes have had damaging impacts. German politicians have become quite judgmental of the European Central Banks accommodative stance while Prime Minister Theresa May back in October suggested that the BoE’s monetary policy has broadened the gap between the rich and poor. With Donald Trump criticising the Federal Reserve for creating a “false economy” adding insult to injury, there could be a shift in power with central bank potentially losing their edge on the markets. There may be a fierce tug of war between politicians and central banks as the year progresses which could create explosive levels of volatility. With political risks and uncertainty already placing central banks under renewed pressures in the New Year, a defensive approach may be adopted by most.

Is the recent surge of the GBP after May’s speech on Brexit just a rebound or has the Pound bottomed out?

The Sterling/Dollar staged an incredible rebound after Prime Minister Theresa May promised a parliamentary vote on Britain’s deal to leave the EU which suggested that she had accepted that the pro-EU parliament would be involved in the negotiations. While Sterling’s resurgence was impressive, there is a threat of upside gains becoming limited in the future as investors re-evaluate the ramifications of a hard Brexit to the UK economy. Uncertainty still remains a key theme when dealing with Sterling in the medium term to longer term with the currency likely to come under renewed selling pressure as anxiety heightens ahead of the article 50 invoke in March.

Although there remains a possibility of Dollar weakness from the Trump uncertainties elevating the GBPUSD higher in the short term, the overall trajectory remains skewed to the downside. Technical traders may observe how the GBPUSD reacts to the pivotal 1.2350 level which could provide some direction. While the GBPUSD rising towards 1.2500 in the short term on the back of the UK government putting the final Brexit deal to parliament is a possibility; more punishments could be expected in the coming months if complications arise from the Brexit negotiations.

What is behind the great performance of the AUD on these first weeks of the year?

A vulnerable Dollar has been the engine behind the AUDUSD explosive gains in the first trading weeks of the New Year with bulls exploiting the upside momentum to install heavy rounds of buying. While the appreciations have made the AUD a strong performer amongst majors, it has more to do with external factors and technicals rather than the Australian economy. The recent rise in demand for Aussie commodities such as Iron and Copper also attributed to the upsurge that saw prices glide to monthly highs.

Although there is a possibility of the AUDUSD edging higher if the Dollar continues to depreciate, gains could be limited in the medium term in the event of US-China trade relations suffering. It must be kept in mind that a potential slowdown in China which relies heavily on exports to the United States may impact Australia that exports over 40% of goods to China. From a technical standpoint, the AUDUSD could edge higher on the daily charts with previous resistance at 0.7500 acting as a dynamic support which could open a path towards 0.7700.

What is your outlook on Gold? Can the bulls continue making a push or is the recent action just a rebound?

The heightened political risks across the globe and uncertainties over how Donald Trump’s policies may impact the US economy have triggered a tidal wave of risk aversion consequently boosting appetite for safe-havens. Gold has exploded into gains this year amid the uncertainty while a vulnerable Dollar continues to inspire bullish investors to install repeated rounds of buying. With anxiety likely to heighten in the coming week amid the Brexit developments, events in Europe and Trump uncertainties, investors may flock to safe-haven investments and such could boost Golds’ allure.

While the prospects of higher US rates in 2017 remains a theme which can cap Golds’ gains in the medium to longer term, the current uncertainty may ensure further gains are captured in the short term. Technical traders may observe how Gold prices react to the $1210 level which if broken could open a path higher towards $1230.