2022 February Outlook For G7 Currencies

2022 February Outlook for G7 Currencies

February 7, 2022

2022 February Outlook for G7 Currencies

Euro and Pound

Mixed Euro and Pound: Euro held under $1.15500 and the Sterling held at about the $1.36000 level at the beginning of February 2022. Going forward, given the strength of the dollar, the euro and pound could still see pressure against the greenback. However, the recent rate hike by the Bank of England (BOE) and hawkish stance on monetary policy from the European Central Bank (ECB) could lend some strength to the Pound and Euro respectively.

ECB adopts hawkish stance: During the recently concluded ECB Press Conference, ECB President Christine Lagarde ruled out keeping rates stable this year, saying that the bank would assess conditions very carefully and that there were “no pledges without conditionalities”. Several ECB policymakers have also taken on a more hawkish stance given the shared concerns over high inflationary pressures. The general market expectations are for the ECB to raise rates by 40 basis points this year.

BOE raises rates: The official bank rate for the Bank of England was hiked to 0.50% last week, prompting a rally for the Sterling over the week to a two-week high of $1.363 after a month of under-performance against the Dollar. Policymakers have also announced that they will begin tapering the central bank’s $875 billion quantitative easing programme, reaffirming their hawkish stance going into February.

Dollar remains on bullish trend: The latest nonfarm payroll data showed a strong U.S. labour market, with 467,000 jobs added in the month of January alone, in comparison to market expectations of just 150,000. Though there was a slight sell-off as investors reassessed the outlook for tightening monetary policy, the U.S. Federal Reserve has made clear its plans to raise interest rates this year, which would continue to lend strength to the greenback as a safe-haven currency going forward.

EURUSD: Bearish below 1.1550

S1	S2	R1	R2
1.1120	–	1.1550	1.1900

GBPUSD: Bearish below 1.3600

S1	S2	R1	R2
1.3350	1.3180	1.3600	1.3750

Commodity Currencies

RBA kept rates unchanged: Aussie struggled to keep up with the bullish momentum, as the Reserve Bank of Australia pledged to keep interest rates at record lows of 0.1% and, as expected, decided to end its bond buying programme. The RBA also raised its inflation expectations sharply but wants to wait and see a lasting recovery in its labour market before choosing to raise interest rates.

Rising oil prices: Rising oil prices could limit the downside of the Loonie, which took a hit in late January as risk aversion flooded markets. Oil prices extend its climb to reach levels not seen since 2014, as supply disruptions exacerbated by geopolitical risks in Ukraine and the massive winter storm in Permian Basin continue to boost its rally. In the recently concluded OPEC meetings, OPEC and its allies agreed to gradually release more barrels into a strengthening market so as not to shock oil prices too much with a surge in supply. Oil prices are expected to stay elevated as demand for crude oil recovers.

Hawkish BOC: In its latest meeting, Bank of Canada left interest rates unchanged but signalled that they will be gearing up for an interest rates hike in the coming weeks to curb rising inflationary pressures. This could provide some support for the Canadian Dollar which has been under pressure against the greenback, as risk aversion continues to pummel the commodity currencies and buoy demand for the Dollar which is considered a safe-haven asset.

Hawkish RBNZ amid a fragile risk environment: Rising inflationary pressures, as annual inflation reaches 5.9%, the highest level seen in 32 years alongside a tightening jobs market could put pressure on the RBNZ to accelerate its interest rates hikes. That said, while New Zealand has been experiencing strong domestic growth as the economy benefited from being one of the first few countries to emerge from the pandemic, the currency took the largest hit in January as compared to its major peers amid the adverse risk environment.

AUDUSD: Bearish below 0.7120