Monetary policy will continue to be the main factor influencing the Forex exchange rate. The willingness of some central banks to act aggressively will encourage their currencies to move forward. Let’s discuss this topic and come up with business plans for USDJPY, EURUSD, GBPJPY, EURGBP, USDCAD and EURCHF.
Fundamental G10 currencies forecast for six months
Whatever the movement of exchange rates on Forex at the end of 2021, you should not take them as systematically important. Investors take profits, take liquidity out of the market, and major traders, knowing this very well, build traps for minor traders. It has always been and will always be so. It is much more interesting what kind of investment ideas will start to be implemented from January.
Inflation, COVID-19 and geopolitical tensions, including trade wars, will be the main risk factors for financial markets in 2022, according to approximately 700 respondents to Markets Live Global Survey, including banks, investment companies and hedge funds. The main question is will consumer prices start to slow down in the second half of next year, or will the inflation regime return as it did in the 1970s?
What matters to me is not the dynamics of price growth, but what central bank officials think about it. In the United States, due to large-scale monetary and fiscal stimulus, inflation accelerated most among the G10. The Fed is ready to act aggressively to curb it. CPI is also growing very fast in the eurozone, but the monetary union is very heterogeneous in its structure. Deflationary thinking prevails within the ECB, so Christine Lagarde and her colleagues currently prefer to adhere to the mantra of the temporary nature of high inflation. Let me remind you that the Federal Reserve has abandoned this mantra. In Japan, consumer prices continue to rise very slowly, allowing BoJ officials to speculate on different ways of monetary policy.
Inflation dynamics in various countries
Different views on inflation lead to different ways of doing monetary policy. The Fed will lower QE in March and raise the federal rate three times. The ECB will slow down assets from 80 billion euros to 20 billion euros a month, and the Bank of Japan will continue to fill the economy with cheap money.
Dynamic balance sheet of a central bank
Interestingly, the Bank of England may begin to reduce its balance sheet as soon as possible. A precondition for this is an increase in the interest rate to 0.5%, which can happen as early as February. BoE’s monetary tightening expectations may push the GBPJPY price up and EURGBP down.
The Bank of Canada has already eliminated QE and intends to raise the overnight rate three times in 2022, as has the Fed. This factor allows the loonie to fight for the role of the best actor of the year among the G10 coins to the end. I doubt that the 0.7% gap in the greenback will be closed before January 1, but the second place is also a very good result. In 2022, the rise in oil prices has slowed USDCAD bears, have a chance to restart, which will allow the CAD to lead the race.
The Swiss franc may look pretty interesting next year. The SNB, which had previously joined the CHF’s weakening policy, may change its position amid accelerating inflation. It will stop interfering with Forex, which will allow EURCHF to continue its decline.
USDJPY price chart in real-time mode
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