Q2 2023 Currency Outlook
In March, the Fed and Jerome Powell decided that one more hike for the year was enough. Was it enough to tame inflation or did they raise rates until “something broke” as is the usual course when the Fed tightens credit. After a few weeks of watching three banks collapse, it is a greater possibility we will see a recession sooner than later and the stagflation dynamics are almost certain. Signs of housing market weakness, labor market layoffs in the tech sector, and consumers struggling with wages not keeping pace with inflation are troubling signs into the second quarter. The good news is that oil and gas are lower and that is only due to recessionary forecasts and a drop-off in global production of goods. Overall, the U.S. dollar may have seen a top for now, assuming rate hikes in the U.S. are done and tightening to tame higher inflation in Europe and the United Kingdom continue. The question is how much weakness we see and if other things break out there to cause a flight back into U.S. dollar safety.
Europe despite geopolitical risks surrounding Ukraine has remained resilient and may be preparing for another leg up for a test of 1.12. The energy issue of dependence on foreign suppliers was mitigated by stockpiles and lower natural gas and oil prices during what was expected to be a harsh winter. Trade dependence on the United States will be important going forward as the U.S. most likely will enter a recession in 2023. Despite this the EUR has rebounded and should benefit from a Fed that is refraining from hikes. As of this writing if EUR/USD closes above the 90-week moving average it will be the first time since September 2021, and could be a better performer into the summer months. Additionally, EUR held up well after Credit Suisse failure and the Deutsche Bank selloff.
Signs of housing market weakness, labor market layoffs in the tech sector, and consumers struggling with wages not keeping pace with inflation are troubling signs into the second quarter.
The British Pound may have more negatives than Europe for now as pressures of Brexit have weighed on trade performance on the continent. A drop in energy prices has certainly been welcoming to the economy along with some tax cuts initiated by the current prime minister. Technically, the proud pound seems like it could play catchup especially if USD weakness catches on versus other G10 currencies over the next few months. It appears that 1.2440 could be a triple top or an inflection point for 1.2700.
After a long run of U.S. yields driving the Yen lower, it seems we have seen the best levels on the long-end of the curve. Expectations of a moderate recession and the Bank of Japan (BoJ) pivot on rates have all weighed on the USD/JPY cross with further losses expected near term. The BoJ also kept the Yen strong by doing a number of interventions to support their currency. In December the BoJ seemed to be setting up for its new Minister of Finance Shunichi Suzuki by relaxing its yield curve control policy which signaled 10-year Japanese yields to rise to 0.5% vs 0.25%. With U.S. rate expectations winding down, we should see a better performance of the Yen in 2023.
David Grimaldi, TM Foreign Exchange Sales Consultant
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