What can we anticipate for Forex in 2023?
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Literally, the entire financial market was shaken last year. This includes Forex, the most active market overall. Those who have seen a number of important events are likely to remember them for a very long period. But let’s not get caught up in the past. What will the forex market look like in 2023? Can we predict if we will experience scenarios with similar opportunities?
The king of the foreign exchange market, the US dollar, has been deposed.
It is obvious from the chart that the downward trend has been dominating since the end of September when examining the development of the dollar index. The indicator is still above normal on a long-term basis, so barring a black swan market intervention, the dollar may still decline this year. Of course, the Fed’s decisions will also have an impact on how strong the US currency is. The market anticipates two additional 25 basis point rate increases from the Fed, which will bring rates up at least twice more. Even higher interest rates may not make the dollar more appealing if the Fed meets forecasts because they are already essentially priced in by the market. If the Fed raises rates by 50 basis points, the surprise would occur. Points at the following meeting, then the dollar might gain further ground across all currency pairs.
The market anticipates one or two interest rate reductions in the US before year’s end, which is completely at odds with the remarks made by Fed officials. This year, they do not anticipate any cuts. Nevertheless, we continue to anticipate that the dollar will decline this year, probably returning to levels seen in February. The US dollar, the currency in which the majority of the world’s oil is exchanged, is rumored to lose its privileged status in the long run, as well as its moniker of “petrodollar.” The dollar would almost definitely not lose its special position in the oil market right away. Even if Saudi Arabia and China have already done so, we cannot anticipate the arrival of Let’s not forget that the US continues to be by far the largest oil producer, as evidenced, for instance, by the “petroleum” in Europe.
Probably out of the woods is Europe. Fortunately, Russia has not completely closed the energy pincers that it has clamped over it. at least right now. Despite the fact that energy supplies have been secured from outside sources, Europe may eventually need to adjust to much more expensive energy. In the long run, this could be problematic for business and the labour market.
Is there a surprise in store for the Japanese Yen?
The Fed’s interest rate increases over the past year on the pair with the US dollar have had a major negative impact on the Japanese yen. But it has tended to gain strength against the main currencies since October. By regulating the yield curve of the 10-year government bond (YCC), whose yield might have been in the +/- 0.5% range at the end of the year, the Bank of Japan has in reality de facto increased interest rates. Japan was forced to act to defend the yen after inflation at least temporarily broke out of a 10-year slump and spiked to levels above 3%. Its substantial depreciation was driving up inflation.This April, Governor Haruhiko Kuroda, the main advocate of a persistently weak monetary policy, will leave office. His successor might “tweak” the YCC framework even more (perhaps into the +- 0.75 zone), which would probably strengthen the yen even more. At the most recent Bank of Japan meeting, we anticipated this, but to no purpose because the Bank of Japan took no action. Therefore, if the head of the central bank changes, there might be a big surprise. Not only could the control over the 10-year yield curve be loosened, but there have also been rumours of a possible base rate increase. The only remaining central bank with a negative interest rate policy is the Bank of Japan. Multiple interest rate increases, however, are extremely unlikely; the central bank will continue to
What do the major banks believe?
The outlooks for forex from the many banks around the world are numerous, so we give ING’s expectations for 2023 in the table below. The latter is quite pessimistic and anticipates a fresh European energy crisis, a resurgence of the US dollar, and a great deal of volatility. View ING Bank’s summary of the key currency pairs for 2023 to learn more.