The USD is closing strong and approaching the first quarter with a high growth potential. One can thank the US Central Bank for leaving policies unchanged instead of beginning the process of asset purchase tapering, as expected. Federal Chair Jerome Powell believes that tapering will only commence midway through 2022, which will pave the way for interest rate hikes. In the time being, a strong rising dollar can be expected through the start of the first financial quarter. Corporate pricing power is holding, and inflation is likely to stay above 3% all year, which means steady ongoing momentum for the dollar.
2022 – A Strong Year For The Yen
Just like the US, The Bank of Japan has decided to hold off on policy changes and will not be hiking rates anytime soon, forecasting steady growth for the Yen. Ongoing supply chain bottlenecks and Japanese factory shutdowns haven’t stifled the strong economic recovery the near-fully vaccinated country of Japan is experiencing. December 2021 kicks off the injection of financial stimulus for Japanese markets in the form of a zero-interest BOJ loan disbursement scheme targeting green initiatives combating climate change. Exports and factory production are also steadily on the rise.
Surging Dollar & Prevailing USD Strength
However, a surging dollar surpassed the Yen for the first time in four years, with the USD/JPY climbing by 0.2% on a single day in November 2021. This leads Commonwealth Bank of Australia strategist Kim Mundy and many leading investors to believe that the USD/JPY has further to go and, expecting it to reach 120.50 by the end of 2022. Overall, dollar strength is expected to shine in the first quarter against currencies that can tolerate high inflation rates like the EUR, JPY, and CHEF.
Midway Performance For The Pound
Through the close of 2021, the GBP has made significant gains. Analysts expect currency performance midway between the surging dollar and its weaker counterparts. The fair value of the GBP/USD fell at 1.17 as of November 2021, falling from a January 2020 price of 1.3250. Even though the UK faces an energy crisis and supply chain issues, like the rest of the world, UK recovery is at a high pace, with S&P Global Ratings projecting GDB expansion of 4.6% in 2022.
Recovery On The Cards For The GBP
With 5-year CDS trades hitting US numbers and the budget deficit forecast to narrow to just 0.6% of the GDP in the 2022 to 2023 financial year, optimistic investors are expecting a big rebound and GBP/USD fair value to reach as high as 1.4. However, we realistically anticipate pre-pandemic levels of around 1.3690 to be far more likely for the first quarter if the UK holds onto its momentum.
EUR Remains Fairly Flat
When paired against the EUR, the GBP/EUR is forecast to strengthen over the course of 2022, but there’s a definite gap in momentum. Whereas The Bank of England is almost certain to raise interest rates in the first quarter, The European Central Bank is clear that it won’t be raising rates. This translates to a strong chance of upswing potential for the Pound against the Euro.
Warnings Of Slow Eurozone Growth
The ECB’s cautiousness is likely to limit and slow the economic recovery of the EUR against the dollar and Pound. Rabobank senior Forex strategist, Jane Foley, forecasts the firm’s prior expectation of the EUR/USD at $1.14 by halfway through 2022 to be too lenient. As other nations like Canada come closer towards hiking rates, currency prices strengthen, particularly against the slipping Euro. The CAD/EUR reached its best level in four-and-a-half years in November 2021, and the growth and momentum are only beginning to build.
AUD Risky But Undervalued
The Dutch multinational banking and financial services corporation ING Bank believes the Australian dollar to be massively undervalued. Yet, with China being Australia’s most vital trade connection that delivers most of the nation’s imports, the AUD is running a massive risk of a potential downturn. Analysts expect levels below what was seen in the first half of 2021 throughout 2022. ING forecasts an AUD/USD exchange rate of 0.73 for the first quarter of 2022, with an expectation of just 0.75 by the end of the year.
Note: Please do not invest money or assets in the financial markets that you cannot afford to lose. This article should not be construed to be investment advice and is for information purposes only.