Global Currencies 1Q23: Returning to Relative Value
Despite Fed's policy moderation, USD strength to be supported by growth and interest rate differential over DM peers
Chief Investment Office20 Dec 2022
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Our outlook for currencies to recover in 2023 hinges heavily on Fed hikes pausing and the world economy averting a hard landing without a financial crisis. By October 2022, it was evident that the USD was very expensive relative to its peers. In November, the USD Index (DXY) plunged 5% after the Fed telegraphed a smaller 50 bps hike to 4.25-4.5% in December. Effectively, the market was removing the risk premium that propelled the DXY to a 20-year high from the four “jumbo” 75 bps Fed hikes in June-November. Assuming US inflation becomes less elevated, we see the Fed Funds rate peaking at 4.75-5% via two 25 bps increases in 1Q23. The odds of Fed hikes pushing into 2Q23 are unlikely because of an imminent fight between the White House and Republican lawmakers to lift the federal debt ceiling before the US Treasury Department runs out of funds by June.

  • In 2H23, assuming the global economy turns the corner amidst inflation cooling from elevated levels, currencies could benefit from the traditional pick-up in exports led by festive demand
  • Despite Fed's policy moderation, USD strength to be supported by growth and interest rate differential over DM peers
  • EUR has scope to consolidate in a 1.00-1.10 range in 2023-2024
  • GBP could hold a 1.20-1.30 range in 2023 and 2024
  • Scope for JPY to recover within a range of 125-140 per USD in 2023-2024

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