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European Union and the United States in 2017

December 24, 2016
european union

This year has been rather extraordinary in many ways. We’ve seen things happening that were considered impossible. The first shock came from the United Kingdom as their decision to leave the European Union was thought to be rather unlikely. Today it is a reality and according to Prime Minister Theresa May, she will trigger the Article 50 by the end of March 2017.

The second big surprise came of course from the United States. Not many expected that Donald Trump will become the next president of the U.S. In the early stages of the presidential campaign it seemed that Hillary Clinton is going to win, no matter what. However, as we got closer to the actual elections the odds turned and eventually Trump surprised us all.

Taking into account the magnitude of the two mentioned events above, we should have plenty to worry about in 2017. It is way too early to tell how Brexit is going to affect the U.K. or the European Union. Also, it is rather difficult to forecast how Mr. Trump is going to lead the United States and what kind of measures he plans to introduce to make America great again.

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All Eyes on the United States

The United States and Donald Trump are going to play the key role in 2017. By now we all know that Mr. Trump has a different approach on numerous subjects compared to your “average politician”. His aggressive stance towards globalization and some foreign policy agreements may shape the markets considerably.

So far, the markets have seen the potential changes in the U.S. as positive for growth and inflation. Dow Jones Industrial Average is slightly below 20 000 points and most likely, we’ll see further gains there in 2017. However, before you load up with US dollar long positions, you should keep in mind that caution is needed.

The main problem, for now, is that we don’t know exactly what kind of changes are ahead of us. Furthermore, we don’t know how these changes are going to affect the U.S. economy in the long run. On top of that, we also have the Federal Reserve and as Ms. Yellen said during the previous press conference, they are looking to hike the rates at least three times in the coming year.

Higher rates will have an effect on all borrowers, including the United States government. As the price of money goes up, all the interest payments go up, which means that servicing one’s debt becomes more expensive.

While the government debt is perhaps not that important because it’s simply so big and it needs a longer-term solution, we should keep our focus on the housing market instead. If the rate hikes cause a disruption there, then things may change rather quickly.

Europe Faces Big Challenges

The rise of populism in the European Union is significant. Political parties that tend to be radical are gaining ground and anti-establishment views are becoming more and more popular. In the same time, economic growth in the majority of EU’s countries is still very low or even non-existent. On top of that, the amount of debt that many European countries carry is unsustainable in the long run.

Furthermore, the security issues in the Western Europe and also in the Eastern Europe are growing. This year Europe has witnessed several terrorist attacks, leaving hundreds dead and much more, scarred for life. The way things are developing, it’s quite clear that the entire EU must work even harder to keep their people safe.

In the eastern part of Europe, security issues are more related to geopolitics. The growing tensions between NATO and the Russian Federation are at their highest point since the Cold War. Both sides are building up troops and equipment close to each other borders without much hesitation. Clearly, any kind of direct confrontation between the two is extremely unlikely but as the current year proved, nothing is certain.

In short, in 2017 Europe is facing big political risks, security risks and uncertainty regarding economic outlook. ECB already extended the QE program in the euro area to give governments more time to implement structural reforms but given the fact that anti-establishment political parties are not overly keen implement then, if elected, the future of the entire EU and EZ hangs in the balance.

Euro’s Future

EURUSD has remained under significant pressure since the previous ECB’s press conference and the FED’s rate hike. Although it seems that the short side of the pair is overcrowded, it may not be enough to trigger a significant short squeeze. Mostly it is because of the political uncertainties as the latest EZ data has actually been rather good. In other words, if we should see a recovery in the EURUSD, then the trigger must come from the United States.

Capital Properties FX
24.12.2016
Kaarel.

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