Forex trends in 2014: U.S. dollar outperforms competition

Forecast for U.S. dollar, euro, pound and gold

U.K. tracking U.S. closely

The long awaited recovery in the U.K. economy appears to be broadening as does the rise in real estate prices. Like in the U.S., the unemployment rate is steadily falling. The combination of a well-supported GBP easing inflationary pressures and rising wages could see people's net earnings turn positive in 2014 for the first time in five years. Such an outcome will make the economic recovery more sustainable.

A more risk friendly environment will also be supportive of GBP and help attract capital to the U.K., which will come in handy to fund the country's large current account deficit. And if the Eurozone recovers, the U.K. may even be able to make some small progress in reducing its current account deficit.

However, the recovery is creating some debate that parts of the economy could start running into capacity bottlenecks next year, which would be potentially inflationary. Combined with rising real estate prices that could prompt the Bank of England to start rising interest rates late this year or in early 2015. Given the U.K. seems to be following a very similar economic and interest cycle to the U.S., it is difficult to see cable making very significant gains versus USD. The range on GBP/USD (FOREX:GBPUSD) is likely to be around 1.6000-1.6700.

Gold should bottom out and recover

Last year was undoubtedly a bad year for gold (COMEX:GCG14). The Fed is to start winding down its QE program, inflation has been benign, equities have soared, ETF liquidations have been big and the global economy appears to be on the mend.

But on the plus side for the bulls, a lot of the hot money has exited gold leaving it in stronger hands. Asian investor demand has remained robust, particularly so in China. Eventually, Asian investors and possibly some central banks should gain the upper hand. But for now gold is still very much locked in a down trend and looks very likely to test lows of $1,000/troy oz. before recovering.

But given Asian investor appetite gold could well recover next year with the summer period proving to be a turning point as it often is for the yellow metal. If Asian investors turn the market around, it won't be long before the hot money returns to ride the wave up.  Gold is likely to trade in a range of $950-$1,200/troy oz. over 2014. 

Demographic tax

As mentioned at the beginning of this note there are some worrying issues. From a demographics point of view the developed world and many emerging market countries, such as China, are turning Japanese. The growing composition of older people in the population is likely to lead to lower consumption in the long run and that in turn is a deflationary force.

However, demographic trends evolve slowly. It's possible that with banks in better shape and probably some limited pent-up demand the economy might be able to buck the demographic trend for a while, maybe even for all of next year.

Possibly related to aging populations is the low labor participation rate in the U.S. If it isn't reversed via more jobs and more older people working, then it will limit the growth potential of the U.S. economy.  To an extent some of the demographic tax can be counteracted by productivity improvements, which are relatively difficult to achieve, and immigration.

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About the Author
Justin Pugsley

Justin Pugsley is the forex and gold markets analyst for New Zealand-based trading platform provider MahiFX. He is a keen student of markets, economics and history. Prior to working with MahiFX, Justin worked for a number of leading media organisations such as Thomson-Reuters and Dow Jones/Wall Street Journal.

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