So far 2016 is proving an eventful year for many of the world’s currencies. The US dollar has experienced a reversal of fortunes after being a favoured destination for capital in recent years.

It had made good ground against the likes of the pound, the euro and the yen, but the continuing uncertain outlook for US interest rates has taken some of the shine away. Closer to home, the pound has been buffeted by concerns surrounding the looming in-or-out referendum on the UK’s European Union membership, with some saying we should brace ourselves for an exchange rate level last seen under the premiership of the late Margaret Thatcher.

Whatever your view, the forex markets remain the instrument of choice for many traders due to the volatility and constant news flow throughout the day. We spoke to a few experts to find out what the rest of the year could have in store for some of the major currency pairs.

Let’s kick things off with our home currency, the pound. It has seen some volatile trading due to those referendum concerns, but in recent weeks managed to claw back a lot of the ground lost in the first couple of months. So could there be further sterling gains to come? Michael Hewson at CMC Markets, thinks some of the recent hysteria is a little over the top.

Bigger picture

‘Amid all the EU referendum speculation we’ve heard various commentators suggest that the GBP/USD rate could fall another 10% to 15% amidst this uncertain backdrop. While it is easy to get caught up in the hype of all of this, it is important to look at the price charts to establish how credible this sort of speculation is. Looking at a long term chart in GBP/USD the pound hasn’t traded below 1.3500 since 1985, and been as high as 1.7000 and even worth 2 US dollars since then. Given that we’ve already fallen quite significantly since the end of last year the question needs to be asked how much is already priced in?

‘From this historical frame of reference the 1.3500 level becomes significant support for the experienced trader, who will ask the question as to what could prompt such a significant move lower, and conclude that the balance of risks favours a move higher, not lower, due to the fact that on a 20-year time frame the pound is cheap, not expensive.’

It is often the case that when everyone thinks a market moving in one direction is a dead cert, the market does completely the opposite. Hewson’s suggestion to step away from the noise and consider the bigger picture looks like sound advice.

Love it or hate it, the referendum discussion is going to dominate the pound’s fortunes against a whole host of currencies in the next couple of months, and it’s a theme picked up on by Chris Beauchamp of IG who considers the fortunes of our currency against the euro - traditionally quoted in the markets as EUR/GBP.

(Click on chart to enlarge)

Brexit shorthand

‘This pair has become a handy shorthand for the Brexit debate. The pros and cons of leaving can be debated endlessly, but following EUR/GBP is a useful way to gauge the current market thinking. Of late the pair has also been influenced by the actions of the European Central Bank, but it is the ebb and flow of the Brexit debate that is providing the focus of attention. Should the ‘Leave’ camp see a bounce in the polls, we could see EUR/GBP move higher.’

Since December the euro has had a good run against the pound - rising from 0.7 to above 0.8 recently. At the moment the polls are suggesting we will be voting for ‘Remain’ - and Laura Parsons from TorFX suggests this will put focus back on the central bank’s actions.

‘The more than one year high of 0.8108 achieved in April may prove to be EUR/GBP’s peak for 2016 if the ECB’s stimulus plans remain in the spotlight and the UK votes to remain part of the European Union in June. With deflation concerns still blighting the eurozone’s recover, the European Central Bank (ECB) is maintaining it will do more to support the currency bloc if required. The ECB cut interest rates and expanded its quantitative easing measures in March and if the central bank continues intimating that further policy adjustments are on the cards, the EUR/GBP exchange rate may adopt a neutral/negative outlook in the medium to long term.’

Land of rising yen

Let’s take the pound and Brexit out of the equation and look at a forex pair that has also enjoyed its fair share of volatility this year - the US dollar/Japanese yen (USD/JPY). The break below the 116 level was a major one in February and saw USD/JPY plunge another 800 points. What’s in store for the rest of 2016? CMC’s Hewson gives his view.

‘When trading the major currency pairs it is important to understand that each pair has different characteristics in the same way a person does. USD/JPY for example traded for all of 2015 between 116.00 and 124.00, before breaking sharply lower earlier this year. Once this range broke out to the downside the US dollar broke aggressively lower, and this is something that this particular pair is well known for. Once it breaks out the move becomes almost pyroclastic (extremely fast-moving) in nature. We saw a similar move in 2012 when the US dollar broke above 85.00 and never looked back.

‘The nature of this move lower would appear to suggest that the next move in USD/JPY is likely to be lower towards 106.00 and 100.00, while we stay below the 116.00 level.’

So further dollar weakness seems to be the outlook here. That’s a view shared by IG’s Beauchamp - with a note of caution.

‘When trading this, attention must be paid to the sometimes Delphic utterances of the Bank of Japan (BoJ). Not only this, but there is also the risk of currency intervention as the BoJ looks to prevent the yen from becoming too strong. Rude shocks are par for the course in forex trading, but with the yen so strong at present traders need to be particularly careful.’

This is sound advice. With some central banks doing more and more to try and stimulate their economies - some would say with little real effect - we should expect ongoing volatility in the various forex pairs for the rest of the year. This is a good thing for traders - we usually need the market to move to try and deliver us a profit - just as long as the risks are managed prudently.