Let us take a step back and analyze the performance of the US Dollar index, the Euro to the USD, and the Pound to the USD in the forex market in 2022.
A Brief Glimpse into the USD, the Euro, and the Pound in 2022
The US Dollar performed well for the first nine months and pulled back in the last three months. We can find a reverse pattern in the Euro and the British Pound. They performed poorly in the first nine months and strengthened in the last part of 2022.
Inflation was the chief concern of many countries across the globe. Energy and Food prices have risen steeply, leading to high inflation. Stringent monetary policy decisions were taken by the Fed, the BoE, and the ECB depending on inflation levels, growth, and labor situations that prevailed in their respective countries.
The US Dollar index hit its highest level in 2 decades in September 2022, the Euro traded below parity in September 2022, and the Pound fell to its lowest level in September 2022.
US Dollar Index
The US Dollar was at 2-decade highs at 114.75 levels in September 2022. The USD began the year at 95.00 levels in January 2022 and climbed steeply, gaining 21% in 2022 by September. The DXY is currently at 103.85 in the last week of December 2022.
The US economy rebounded after the pandemic, with the Fed increasing rates at a rapid pace. Inflation slowed down towards the end of 2022 in the US, with commodity prices moving lower. Inflation was at its highest point at 9.1 in June 2022 and eased to 7.1 in November 2022. Though the inflation rate has come down, it is above the target set by the Fed at 2%.
British Pound to US Dollar (GBP/USD)
The British Pound slid to life lows in September 2022 and was one of the worst performers among other major currencies.
In January 2022, the GBP/USD was at its highest level at 1.3750. The British Pound slipped 24% from January highs to reach life-low levels at 1.0384 in September 2022. The Sterling then recovered almost 1700 pips from September and is trading at 1.2110 in the last week of December 2022.
At the close of 2022, the British Pound to the US Dollar is at the 1.21 level.
Bank of England hiked rates to 3.5% in December 2022, when inflation rose to a 41-year high in October. Though inflation saw a slight recovery, the consumer price index in the United Kingdom is much higher than the target set by the Bank of England at 2%. There is fear of recession as the labor market shows signs of shrinking.
High consumer energy bills are the leading contributors to increasing inflation. The Energy Price Guarantee Scheme by the government will help consumers combat high energy costs predict analysts.
Euro to US Dollar (EUR/USD)
The Euro to US Dollar began the year at 1.1480 in January 2022 and saw a gradual decline to 0.9535 in September 2022, falling 19% between January and September. The EUR/USD is currently trading at 1.0650 levels in the last week of December 2022, surging by 11.7%.
The Euro fell below parity against the US Dollar in 2022, the lowest mark in two decades for the European currency. Inflation is at double digits at 10.1% in December 2022, slightly lower than November data at 10.6%.
The ECB was slow to tighten policy rates, despite high inflation hitting the Eurozone. The severe energy crisis has negatively impacted the EU, especially during the cold winter months. The energy crisis may bring further contraction in the Euro Area, predict experts.
The ECB may hike rates, at a faster pace, in 2023 to tame inflation. The rate hike during the last monetary policy meeting in December 2022 was the fourth increase. Marginal lending is at 2.75%, deposit facility at 2%, and refinance rate at 2.5%. The ECB criteria are to maintain price stability.
Russian War on Ukraine
After the Covid pandemic, it was the Russian war on Ukraine that caused a surge in commodity prices. Russia and Ukraine are the leading exporters of sunflower oil, corn, wheat, and barley. The war in Ukraine broke the global supply chain in the food market and energy sector.
The European Union and the United Kingdom faced soaring energy prices even before the Russian invasion of Ukraine in February. The war triggered a further crisis in the energy sector, bringing a steep hike in natural gas prices. Russia meets almost 40% of natural gas requirements in Europe.
US Dollar to Japanese Yen (USD/YEN)
USD/JPY currency pair surged 25% in 2022. The Dollar to Japanese Yen index started January 2022 at 113.50 but surged higher to 152 levels in October 2022. The Japanese Yen recovered to 132 levels in the last week of December 2022.
Even as the Japanese currency slides, the Bank of Japan keeps interest rates below zero. Japan maintains an ultra-low interest rate policy, despite the inflation rate at 3.6% in October, higher than the 2% target set by the central government.
The Japanese Yen is another worst-performing currency in 2022 in the global forex market. Though the US Dollar trades below the 200-DMA, the Japanese Yen remains under the ¥134.50 level.
Let us look forward to better forex trading in the New Year 2023.