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Major Currencies in 2023 and Future Expectations

Gulf Brokers Ltd.

As inflationary pressures continue to subside, major currencies of the world’s superpowers are on the course of stability. Central banks have recurrently hiked interest rates to destimulate red-hot economies which have been scorched by macroeconomic instability and growing concerns of imminent recessions.

Major Currencies in 2023 and Future Expectations Gulf Brokers

After soaring to record highs before the winter of 2022, the US dollar greenback has gone through a downward trend to surpass seven-month lows as of mid-January of 2023, the Euro and Great British Pound are retrieving value lost in the red sea of inflationary wounds and both the Chinese yuan and Japanese yen have exhibited resilient growth.

A brief look into the performance of major currencies and their future projections:

USD Cooling Down

The U.S. dollar was on a relentless frenzy of escalation in 2022, fueled by supply & demand imbalances, soaring energy prices, fresh COVID-19 cases in China and other demoralizing drivers. The Federal Reserve did not think twice in aggressively hiking interest rates to tame inflation, and the diminishing dollar index reflects a recovering market.

As seen in the TradingView-powered chart, the dollar index which tracks the greenback against a basket of other major currencies is currently valued at 101.976, marking a seven-month low. Inflation is cooling down amid improving global growth prospects and the re-opening of the Chinese economy, consequently preparing the nation for a 25 basis-point rate hike.

What’s next for the bearish USD? Given expectations that the Federal Reserve will be less aggressive with future rate hikes, the focus will center around the brightness of data from around the world, most notably the revelations from the Bank of Japan’s (BoJ) next policy meeting which may pave the way for the upcoming price trajectory.

Euro on the Rise

Arguably the hardest-hit from the bunch, the euro deteriorated to 20-year lows as the Russia-Ukraine war skyrocketed energy prices, and the closure of the highly-utilized Nord Stream 1 has further-constrained energy supply in the continent. This created havoc and ensued record-high inflation, growing investor skepticism and higher consumer reluctancy to spend and invest.

The European Central Bank (ECB) which was historically hesitant to bump interest rates has followed suit of other major nations in their approach towards combating inflation, startling markets after hiking rates by a larger-than-expected amount in July.

Looking into its recent price movements, the EUR/USD enjoyed exuberant growth from the start of November, as the central bank rose interest rates in September and October which nourished the beat-up currency.

What’s next for the euro? The short-term outlook seems optimistic, but gains may be limited as the Eurozone bond market is not exhibiting much robust growth. Whether the euro will continue to rally in the long-run may depend on the macrotrends in other nations, as well as the ECB’s approach towards settling inflationary pressures.

British Pound Seeking Strength

The economy of the United Kingdom has witnessed a lot of hardship in 2022 to say the least. Throughout the year, the UK has been a victim of calamitous inflationary cycles, caused by rising energy prices, complicating Russia-Ukraine conflicts and the ripples of lifting COVID restrictions.

As a result, the Great British Pound (GBP) has plunged to 37-year lows, struggling to see the light as national and global pressures continued to mount on the backs of taxpayers. Recently, the GBP is seeking strength and has been recovering amid a weaker dollar and improved UK financial stability, adding noticeable resilience to the hammered pound.

From a technical perspective, the optimistic GBP/USD rally began in October was predominantly the result of the strict economy-tightening approach adopted by the Bank of England (BoE). One interest rate hike after the other, the Old Lady has raised rates by a combined 325 basis points in 2022 alone; persistently and forcefully slowing down the gears of the prosperous economy.

What’s next for the pound? After recent surveys indicated strengthening wage growth, this may push the BoE to hike interest rates by another 50 basis points, which’ll likely send the GBP downwards for the short-term, but will equip it with more durability for the long-run.

Chinese Yuan Rockets

One currency to look out for would be the Chinese yuan. Its stability was heavily hindered by recurrent fresh COVID-19 waves which prompted authorities to apply city-wide shutdowns; halting business activity and expenditure on a large scale. Consequently, the attractive yuan continued to tumble in 2022.

The Asian nation’s pivot away from its stringent ‘COVID-zero’ policy played an important role in spreading optimism regarding recovery. With restrictions being lifted, the yuan has kickstarted its journey of recovery. According to Jing Liu, Chief Economist for Greater China at HSBC, the removal of restrictions will further accelerate the nation’s economic growth.

From a technical perspective, the TradingView chart above shows the recent sharp declines of the USD/CNY currency pair, which indicates that the dollar greenback is losing ground against the Chinese yuan.

What’s next for the Chinese yuan? While business and consumer activity are on the rise, exports may remain constrained as the global economy weakens, and foreign exchange market conditions may remain volatile which’ll cap the growth of the Chinese yuan in the short-term.

Japanese Yen Gaining Ground

Safe-haven Japanese yen is the hot topic of the year. After the world’s third most-traded currency declined to 24-year lows in 2022 due to macroeconomic debacles & soaring consumer prices, the Bank of Japan maintained its ultra-cool monetary policy stance, at least for a while.

Low domestic demand and stagnant economic recovery has decayed the fan-favorite yen to unforeseen lows; at some point, the yen dropped 30% against the US dollar. The central bank then announced a shift in its loose monetary policy, increasing the 10-year Japanese government bond yield by as high as 0.5%, which is double the previous cap of 0.25%.

Recent months has brought about a sturdy recovery in the Japanese yen as seen in the TradingView chart above, with the USD/JPY losing nearly 15% in value since mid-October of 2022 to currently price at 128.420, and that is a level unseen since May of 2022.

What’s next for the Japanese yen? The future trajectory of the globally-trusted JPY will be guided by the monetary policies of the US Fed and the BoJ. As noted by Marc Chandler, chief market strategist at Bannockburn Global Forex, the dovish BoJ may “take another step away from its easy monetary policy”, and this may accelerate the yen’s recovery.

Syam KP, Financial Analyst of Gulfbrokers Ltd.

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