Last year turned out to be a very interesting year for Forex traders: in the first half of the year we were operating in the situation of low volatility, but in the final six months the major currency pairs experienced some really strong moves. The market was stirred to action by the rising demand for the US dollar.

Under the sign of USD
The US dollar index fluctuated in the 80.0 area in January-July, but then took off and rose to the nine-year highs in the 90.00 area. The outlook for the greenback in 2015 is still very positive. The main driver of the American currency to the upside is the policy divergence between the Federal Reserve and other major central banks. The Fed has finally finished QE3 – the latest round of Treasury and mortgage-bond purchases – and dropped commitment to keep rates low for a considerable time. The central bank has removed unconventional stimulus as American economy is in a fairly good shape. The unemployment rate fell to six-year low, consumer and business sentiment is improving, manufacturing and services sectors feel fine, and the pace of slack absorption has accelerated in the recent months. American economic growth in Q3 was revised up to five percent. According to most economists’ estimates, the Fed will start raising its benchmark short-term rate around June 2015.

FBS Markets Inc. has recently been given the prestigious Best Broker, Middle East, 2015 award by Forex Report

Despite all these rosy prospects for the USD, there are some risks for the bullish outlook which we have to mention. The main danger is that the Fed will hesitate to tighten policy and try to prolong the period of lower interest rates. The most evident reason for a delay in hiking rates can be low inflation. US consumer prices recorded the biggest decline in nearly six years in November curbed by the falling oil prices. If American equity and housing prices start to decline, Janet Yellen and her colleagues may be tempted to use the monetary ammunition or at least to give the business more time to enjoy lower rates. So, monitoring US inflation trends may provide insights to what on the Fed’s mind.

The strengthening US economy clearly stands out as the economic growth in China is slowing down, the euro area has its financial and economic woes come back and Japan still has to find a way to revive growth and inflation. Many economists wonder if America manages to keep growing while the rest of the world is staggering or it gets contaminated by this weak growth disease. In our view, the US is definitely on the right track, but given all the risks the Fed may take more time until starting the rate hikes than the majority thinks. Still, if American central bank sounds calm, but confident about the country’s economic prospects, US equity market and the greenback will flourish.

EUR is a truly sore spot
Euro area is projected to face serious economic and political challenges in the coming year. To begin with, the economy is paralysed by the deflationary pressure – consumer activity in the region remains subdued. The European Central Bank is widely expected to launch a full-scale quantitative easing programme (QE) in the coming year. According to the ECB’s President Mario Draghi, balance sheet should increase by another one trillion euro to three trillion euro in order to battle low inflation and revive the economy. For now German government remains opposed to such an aggressive stimulus, but Draghi is doing his best to be persuasive. If launched, QE will significantly weaken the European currency, pushing EUR/USD to parity or even lower. Growing divergence between the Fed’s and the ECB’s monetary policies is a strong negative factor for the pair. Greece is another pain in the neck for the euro. Parliamentary election in early 2015 would probably be won by the radical leftist Syriza party that doesn’t support the Greek bailout programme. In this case question of the “Grexit” out of the euro zone will return into the limelight, bringing the instability back to the market.

JPY will remain under pressure
Japanese economy slipped into recession after the nation’s government increased the sales tax in April. Japan’s GDP fell by more than seven percent in Q2 from the previous three months. The fundamental problem is that large exporters like Toyota, Sony and Toshiba, which benefit from yen’s depreciation, are reluctant to lift wages. As a result, Japanese consumers spend very little and this hurts the nation’s economic growth. So, to0 keep the economy going and achieve the two percent inflation goal Japan has to conduct aggressive stimulus pumping 80 trillion yen ($669.40bn) a year into the nation’s financial system. Such a huge amount of monetary easing is a bearish factor for Japanese yen. USD/JPY may rise up to the 130.00 handle. Note, however, that although yen’s depreciation is welcome for Japan at some point, Japanese authorities do worry that the currency’s decline was is rapid as it hurts importers and decreases purchasing power of the population. As a result, they can perform verbal and actual interventions above 125 yen per dollar. In addition, there may be some prolonged periods of risk aversion in 2015 – another factor which can revive the market’s demand for the Japanese currency.

Oil market: when will the fall reverse?
The dramatic fall of oil prices from $115 to $60 per barrel in six months was clearly in the spotlight in 2014. The decline was provoked by the increased production and the weakened demand for this commodity.

What impact will this oil slump have on the global economy? History shows that such oil shocks can be positive for the world economy helping it ‘refuel’, as cheap oil reduces transport and production costs. Such correlation was visible in 2008 when oil depreciation gave a hand to the economy hit by the global financial crisis. An important interplay was spotted by the Oxford Economics survey: a decline in oil price by every 20 percent increases global growth by 0.4 percent over the next two to three years. So, low prices will act as a critical cushion for the global economic growth in the coming years.

It’s important to note, however, that cheap energy will have different effect on oil importers and exporters. The developing countries which import large volumes of oil and have high inflation like India and Indonesia will surely benefit. Oil consumer #1 – China – will also get its advantages. Although the United States is increasing oil production at the highest speed in the world, it still remains a net oil importer and will also stay in profit. Goldman Sachs has calculated that oil decline will shave less than 0.1 percent of the nation’s GDP. Japan and euro area also enjoy cheap resources, but, as they are under threat of deflation, falling oil creates unnecessary pressure on their consumer prices, and their central banks swamp the market with cheap EUR and JPY.

Oil exporters are those who will get the worst of it. Venezuela, Iran, and Russia which failed to save and invest the enormous oil incomes will surely suffer. Saudi Arabia, on the other hand, has managed to build large sovereign wealth funds when the oil prices were high, and these funds will act as an airbag in the new reality.

On balance the gains of oil importers should outweigh the losses of oil exporters. After all, 10 largest oil importers including Europe, USA and China, account for 65 percent of the global GDP.

It’s not easy to say where the bottom for the oil prices will be. The current decline looks like a cyclical one and may last several years. Given Saudi’s clear unwillingness to lower output, we see more downside potential for oil prices at least until the next OPEC meeting this summer. The price can slide to $40-$20 per barrel. In the end, however, the rich Persian Gulf nations may be forced to soften their positions fearing new “Arab springs” and act to limit supply. Anyway, the recovery back above $100 per barrel is obviously out of the question, the best hope is that the price will return to $60-$70 per barrel.

Trading with FBS is a way to success
FBS Markets Inс. is an international brokerage company founded in 2009. Today it occupies one of the leading positions on Forex. FBS was chosen as the Best Forex Brand, Asia, Best Forex Broker Asia (four years in a row), Leading in Quality Service to Customer, The Best Broker in Asia-Pacific Region and The Best Partnership Program. All in all, the company was awarded with 20 prestigious prizes.

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This year, FBS has been awarded Best Broker, Middle East, 2015.