2022 January Outlook for G7 Currencies
2022 January Outlook for G7 Currencies
Euro and Pound
Bearish Euro and Pound: Euro held at about $1.13 and the Sterling held at around the $1.35 level to start off the new year in January 2022. Going forward, given the strength of the dollar, the euro and pound could still see pressure against the greenback. The U.S. Federal Reserve is expected hike interest rates as early as March 2022 in order to curb inflationary pressures and in response to an improving labour market.
ECB maintains dovish stance: The European Central Bank is set to hold interest rates near record-low levels in 2022, maintaining a dovish stance on monetary policy despite progress being made on economic recovery. In comparison to other central banks around the world, the ECB is seen to be much slower in tightening its monetary policy in pursuit of its medium-term inflation target.
Possible improvement in Britain’s market sentiment: Market sentiment could be improving in the U.K., as seen by the unexpected rate hikes in December 2021 and the refusal from the government to tighten restrictions in response to the rapid spread of the Omicron variant. However, this positive sentiment could still be contested by slowing economic recovery, mounting inflationary pressures, rising COVID-19 cases and post-Brexit tensions.
High expectations for the U.S. labour market: The U.S. labour market was expected to show significant improvement in the latest nonfarm payrolls report, but disappointed by falling well below market expectations. However, unemployment rate dropped much faster than expected to 3.9% and hourly wages gained 4.7% from a year ago. This could still support the Fed’s decision to speed up the timeline for interest rate hikes.
EURUSD: Bearish below 1.1450
GBPUSD: Bearish below 1.3600
Divergence in monetary policy outlook between the Fed and RBA: In the latest RBA meeting, the central bank left benchmark rates unchanged at 0.10% and kept the asset purchases at a rate of $4.0 billion a week until at least February 2022. Australia’s economy is expected to return to pre-delta levels in the first half of 2022, with vaccination and its ultra-loose monetary policy underpinning the economic recovery. That said, higher inflation with headline CPI at 3%, attributed to higher petrol prices and supply bottlenecks alongside a tightening labour market, with November’s unemployment rate at 4.6%, below 5.0% estimates, is not a strong case for a hawkish tilt by the RBA. This coupled with hawkish pivots by some of the major central banks, notably the Fed who projected 3 interest rates hike for 2022 could put pressure on the Australian Dollar.
Risk-on mood stepping into 2022: Aussie is a risk proxy currency and with the recent optimism witnessed in the markets alongside strong economic data from China, one of Australia’s largest trading partners, it could limit the Aussie’s downside. Meanwhile, there seems to be consensus that effects from the Omicron variant are milder and would not derail the economic recovery. Elsewhere, PBOC’s recent move in reducing the reserve requirement ratio for banks by 0.5 percentage point, which would unleash about 1.2 trillion yuan, or $188.3 billion, into the financial system also helped to tide through the property slump following Evergrande’s debt crisis.
Narrowing gap between RBNZ and major central banks: Major central banks such as the BoE and Fed are catching up with the RBNZ as they set the stage for interest rates hikes in 2022. RBNZ is the first central bank among its G7 peers to raise interest rates following the pandemic to curb rising inflation and signalled more tightening ahead. This year, if Fed were to proceed with its 3 projected interest rates hike in 2022, we could see interest rates differentials between the NZD and USD narrow, limiting the upside of the currency.
Easing oil prices: Canada is one of the world’s largest exporters of oil and the Loonie benefited from rising oil prices amid a global energy crunch as fuel demand rose back to near pandemic levels. This alongside low inventories following deep production cuts by the OPEC+ for almost a year pushed oil prices higher. With the world’s top importer China’s recent cut in the first batch of crude import allocations for 2022 and OPEC+’s decision to raise its output target by 400,000 barrels per day from February, we could see an ease in rising oil prices.
AUDUSD: Bearish below 0.7320
NZDUSD: Bearish below 0.7000
USDCAD: Bullish above 1.2670