Market Extra: Currency traders have already worn out their 2017 trading themes

Tighter monetary policy, U.S. tax-cut prospects and European growth are among the ideas that have driven currency trading in 2017. But with less than three months to go before the end of the year, traders are wondering if those themes are largely played out.

Here’s a look at how key 2017 themes have played out so far:

Central bank normalization

The U.S. dollar’s DXY, -0.10%  turnaround last month came as investor expectations for a December rate increase rebounded. At this point, Fed funds futures show a rate rise is roughly 90% priced in, leaving little else as a potential positive catalyst for the rest of the year, market participants said.

“The Fed is well ahead of its peers in terms of normalization,” said Eric Theoret, currency strategist at Scotiabank. And being the trend setter in monetary policy, this could also mean that no other central bank wants to front-run Chairwoman Janet Yellen and her gang of policy makers.

Dollar rivals, such as the British pound GBPUSD, +0.3242% Canadian dollar USDCAD, +0.0000% and euro EURUSD, +0.0000% have also been heavily driven by central bank actions. In fact, the Bank of Canada raised rates twice this year, before sounding cautious notes last month and the Bank of England put a 2017 rate increase on investors’ minds in some September remarks.

See: Euro, loonie, sterling still offer more upside even after hawkish Fed, analysts say

The European Central Bank is expected to offer some detail regarding whether and how it will begin to taper its asset buying program when policy makers meet on Oct. 26s.

“We are also concerned that the ECB and the BOE are tightening policy in the face of a deteriorating inflation outlook,” wrote Bank of America analysts Aditya Bhave and Ethan S. Harris in a note on Monday.

The euro has risen 12.5% against the dollar in 2017, creating an unwanted drag on inflation that could slow the ECB’s path toward normalizing monetary policy.

Trump’s agenda

Then there is the question of a U.S. tax cut and if, when and in what form it will come. The Trump administration and Republican Congress’s legislative difficulties, including failed efforts to repeal Obamacare, dented confidence in prospects for passage of fiscal stimulus.

“Tax reform isn’t really priced in[to the dollar] yet, because a lot of people got burned earlier in the year when expectations for the Trump administration weren’t met and the dollar sold off,” said Mizuho FX strategist Sireen Harajli.

The discussion around tax cuts has grown louder in recent weeks, but doubts remain. “I think there is a high hurdle in Congress [to pass a tax bill],” Harajli added, saying that 2018 could be a more realistic time line to get this done.

European growth bonanza

And what about Europe?

European growth indicators have been pointing up, and as the EU is lagging behind the U.S. in terms of its economic recovery, investors considered the European economy to be more buoyant for now. However, political uncertainty has been mounting. Brexit negotiations are the elephant in the room, Germany has yet to decide on a new coalition government, and the future of the Spanish autonomous region of Catalonia is filled with question marks. Next year will also see Italian elections, which could also create political turmoil if a popular euroskeptic party does well.

“Europe has been at the forefront of the ongoing pickup in global growth. However, the generally positive growth picture is clouded by political uncertainty and the risk of a premature hawkish turn by monetary policy makers,” Bhave and Harris said.

Brexit negotiations have taken the British pound for a wild ride, and the euro has exhibited sensitivity to the idiosyncratic flare-ups such as Catalonia’s independence referendum or the German election, which despite some polling inaccuracies broadly confirmed expectations.

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