2023 January Outlook For G7 Currencies

2023 January Outlook for G7 Currencies

January 31, 2023

2023 January Outlook for G7 Currencies

Dollar, Euro and Pound

Dollar pared gains to reach new lows as the Fed nears the end of its tightening cycle

The dollar index fell to lows last seen in June 2022, as the Fed nears its target terminal rate of 5%. The dollar is also being dragged down by signs that economic growth is cooling, as Americans cut back on retail purchases, which make up a large proportion of economic activity. Slower growth could signal a more dovish Fed, which is why markets have not only priced in a terminal rate lower than the Fed’s projected 5%, but also expect unplanned rate cuts later in the year. Markets are currently pricing in a soft landing for the US economy, where inflation is eliminated through a shallow recession and the economy recovers relatively quickly. In this scenario, the dollar could see further downside as global assets gain lustre and the Fed reduces rates.

Euro rallied on strong economic data and hawkish ECB

The Euro continued its climb against the dollar as consumer sentiment picked up and business activity grew for the first time in 6 months. Unemployment remained at a record low, signifying a tightening job market. Inflation remained well above the ECB’s target 2%, with the ECB indicating rate hikes of 50bps in both February and March. Strong economic prospects coupled with a hawkish ECB could see continued upside for the Euro, especially with the Fed signalling that it is nearing the end of its tightening cycle. The ECB, on the other hand, remains on course to maintain its current pace of tightening at least until the summer.

Sterling regained lost ground on mixed economic data

The pound retraced to last month’s high of $1.24 against the greenback, despite signs of slowing growth and increasing macroeconomic headwinds for the UK economy. Business activity fell at the fastest rate since 2021, even as businesses remain optimistic about 2023. Retail sales fell in December, as consumers cut back on spending due to inflation. Inflation slowed for the second consecutive month, even though it remained above the BoE’s 2% target. The economy managed to grow slightly in November, exceeding market forecasts of a decline. Chief economist Pill warned of persistent inflation stemming from full employment, an ominous warning given that data showed both employment and wages growing in November. Markets are expecting a 50bps rate hike at the next BoE meeting in February, which could push the pound higher.

EURUSD: Bullish above 1.0780

S1	S2	R1	R2
1.0780	1.0520	1.1080	–

GBPUSD: Bullish above 1.2120

S1	S2	R1	R2
1.2120	1.1820	1.2650	–

Commodity Currencies

Aussie’s rally fuelled by China’s lifted restrictions and RBA’s hawkish stance

The Australian dollar appreciated past $0.70, reaching its strongest levels in over five months due to a combination of factors, including higher-than-expected inflation data, the lifting of restrictions on Australian coal exports by China, and the Reserve Bank of Australia’s efforts to reduce inflation through interest rate hikes. The release of recent inflation data has increased expectations for more aggressive tightening cycles by the RBA, with markets anticipating a rate hike in February. The strong Australian economy has also played a role in supporting the currency’s rally.

Kiwi weakens on Jacinda Arden’s shock exit, low inflation, and anticipation of milder rate hike by RBNZ

Kiwi Dollar rallied above $0.65 before paring gains towards the end of the month as inflation data fell short of the Reserve Bank of New Zealand’s forecast. As a result, markets are now anticipating a rate hike of 50 basis points at the RBNZ’s next meeting in February, a downshift from its previous forecast of a 75bps hike. Elsewhere, the popularity of New Zealand’s Labour Party has seen an increase following Jacinda Ardern’s resignation, as shown by two new polls, which are some of the best results the party has seen in a year. The polls, which were released on Monday night, are the first to be conducted after Ardern’s unexpected departure and indicate a rise in support for both the party and its new Prime Minister, Chris Hipkins.

Loonie surges on strong jobs report and bets on BoC’s policy tightening

The Canadian dollar has shown significant strength against the US dollar recently, particularly after the release of employment data that showed a significant increase in jobs last month and a decline in the unemployment rate. This has led to increased bets on further tightening by the Bank of Canada and a higher chance of a rate hike at its next policy meeting. The strong Canadian economy, supported by increased demand from China’s reopening and a boom in the value of building permits, has played a significant role in supporting the currency’s rally.

Gold extended its rally amid Fed policy expectations

Gold prices have been on the rise due to the weakness of the US dollar and expectations of a slower pace of rate hikes by the Federal Reserve. The price of gold reached above $1930 per ounce, on the back of the Dollar’s weakness before paring recent gains as minutes from the Fed’s December meeting revealed that the central bank still plans to raise rates to control inflation. Investors are currently awaiting the outcome of the Fed’s policy meeting in February, with expectations for a smaller 25 basis point rate hike, which could potentially drive gold prices higher. The recent mixed US economic data, corporate earnings, and comments from Fed officials have also contributed to gold trading near its nine-month high at $1930 per ounce. Despite the speculation of a smaller rate hike, Fed officials remain committed to maintaining price stability, which may limit gold’s short-term growth.

AUDUSD: Limited downside below 0.7150