2022 December Outlook For G7 Currencies

2022 December Outlook for G7 Currencies

January 5, 2023

2022 December Outlook for G7 Currencies

Dollar, Euro and Pound

Dollar pared gains on anticipation of a slower pace of Fed tightening going forward

Dollar erased gains coming into December year as markets anticipate a slower pace of interest rates hike by the Fed moving forward. Softer inflation data alongside a decline in retail sales activity, manufacturing PMI and jobs data corresponded with Fed’s concern of overtightening. At its last policy meeting this year, Fed delivered a 50bps rate hike, marking its seventh consecutive hike to rein in decades-high inflation. Moving forward, policy makers signalled a path of higher interest rates at a slower pace to bring inflation back to its 2% target. We could see Dollar continue to struggle for more upside for the rest of the year as the currency battles December seasonality as well while its appeal as a safe-haven asset amid global recessions concerns would limit its downside.

Euro rallied higher on the back of Dollar’s weakness

Hawkish ECB stance supported the Euro’s rally in December, as we saw prominent buying activities against the greenback. In its latest monetary policy meeting, ECB lifted rates by 50bps and signalled more rates to follow as the region continues to battle supply-driven inflation exacerbated by the energy crisis. Growth outlook was also revised down sharply from its previous forecast. A series of economic data also showed that inflationary pressures in Europe have finally peaked. Despite this, the euro remains near its highest level since June due to the likelihood that the European Central Bank (ECB) will continue to raise interest rates in order to address inflation, which is still above the ECB’s target of 2% despite some signs of easing. Elsewhere, the Eurozone imposed a price cap on natural gas prices to protect consumers from rocketing energy prices. For the year, the euro has lost approximately 7% against the dollar in 2022, reaching a 20-year low of $0.96 in September, as investors sought safer investments due to concerns about the potential for a severe economic recession in Europe amid ongoing conflict in Ukraine, increasing borrowing costs, and persistent high inflation.

Sterling held gains against the greenback as inflation eased

Pound traded at around $1.2 in December against the Dollar, hovering near its one-month low, despite the recent weakening of the dollar. This is due to ongoing evaluation by investors of the outlook for monetary policy at the Federal Reserve and the Bank of England. While Fed officials have consistently indicated that they will continue to raise interest rates for an extended period, the Bank of England has suggested that its tightening path may soon come to an end as inflation has peaked and a recession in the British economy appears imminent. In addition, warmer weather in Europe has caused UK natural gas contracts to hover at their lowest level since June, significantly reducing inflation expectations. The British pound ended 2022 down almost 11%, its worst performance since the Brexit vote in 2016.

EURUSD: Bullish above 1.0550

S1	S2	R1	R2
1.0550	1.0320	1.0880	–

GBPUSD: Bullish above 1.1950

S1	S2	R1	R2
1.1950	1.1620	1.2450	–

Commodity Currencies

Aussie remained vulnerable amid the macro headwinds

Australian dollar hovered around $0.68 against the greenback due to concerns that further interest rate hikes by major central banks and rising Covid-19 cases in China could hinder global economic growth and reduce demand for commodities. The International Monetary Fund (IMF) also warned that 2023 will be a difficult year as major economic powers such as the US, Europe, and China are all experiencing slowing activity. Despite these challenges, the Australian dollar is supported by expectations that the Reserve Bank of Australia (RBA) will continue to raise interest rates this year to bring down inflation. The RBA raised the cash rate by a total of 300 basis points in eight consecutive meetings in 2022, increasing borrowing costs to a 10-year high of 3.1%. There is currently disagreement among market participants about whether the RBA will deliver another interest rate increase at its February 7th meeting, though a peak of 3.85% is still expected later in the year.

Kiwi struggled for further upside

Amidst concerns that further interest rate hikes by central banks and the proliferation of Covid-19 cases in China could impede global growth and diminish demand for commodities, the New Zealand dollar remained unsteady at a value of roughly $0.63. The International Monetary Fund’s Managing Director, Kristalina Georgiva, also cautioned that 2023 will pose significant challenges as the primary drivers of growth in the US, Europe, and China are all experiencing weakening activity. Despite these challenges, the New Zealand dollar has appreciated approximately 15% since October, due in part to the Reserve Bank of New Zealand’s (RBNZ) determined monetary tightening campaign, which has seen the policy rate increase by a cumulative 400 basis points over the course of nine consecutive meetings beginning in October 2021 and has brought the cash rate to a 14-year high of 4.25%. This marks the most aggressive tightening cycle since the inception of the cash rate in 1999.

Loonie remains weak against greenback

The value of the Canadian dollar was around $1.36, as investors continue to react to hawkish statements from major central banks including the Federal Reserve and a surprise move by the Bank of Japan. Earlier this month, the Bank of Canada raised its overnight rate by 50 basis points, bringing it to the highest level since 2008. However, the central bank noted that it would consider whether the interest rate needs to be increased further, indicating the possibility of a slower pace of rate hikes or the end of the tightening cycle.

Elsewhere, oil prices struggled with direction in December, with West Texas Intermediate (WTI) crude futures rebounding to $72 per barrel after falling to a one-year low of around $71 in the previous session, while Brent crude futures remained close to a one-year low of around $76 per barrel. The mixed performance was due to a combination of factors, including optimism about the reopening of the Chinese economy and higher demand from the world’s largest crude importer, the shutdown of the Keystone pipeline and uncertainty about the impact of sanctions on Russian oil, and concerns about a potential global recession-driven demand downturn, particularly among advanced economies. On the supply side, the Organization of the Petroleum Exporting Countries (OPEC) and its allies decided to maintain their policy of reducing oil output by 2 million barrels per day from November through 2023, while the Keystone pipeline remained closed and President Vladimir Putin threatened to cut production in response to a Western price cap on Russian crude.

AUDUSD: Bullish above 0.6880