Who runs the show in Forex? Forecast for USDJPY, EURUSD, GBPJPY, EURGBP, USDCAD and EURCHF as of 27.12.2021

Monetary policy will continue to be the main factor influencing the Forex exchange rate formation. The willingness of some central banks to act aggressively will encourage their currencies to go ahead. Let’s discuss this topic and make up trading 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 systemically important. Investors take profits, withdraw liquidity from the market, and major traders, knowing this very well, build traps for minor traders. It has always been and will be so. It is much more interesting what investment ideas will begin 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 some 700 respondents to a Markets Live Global Survey, including banks, investment companies and hedge funds. The main question is whether consumer prices will start to slow down in the second half of next year, or will the inflationary regime as in the 1970s return?

For me, it is not the dynamics of price growth that is important, but what central banks’ officials think about it. In the US, due to large-scale monetary and fiscal stimulus, inflation has accelerated the most among the G10. The Fed is ready to act aggressively to curb it. CPI is also growing very quickly 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, for now, 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 about different ways of monetary policy.

Inflation dynamics in different countries

  

Source: Bloomberg.

Different views on inflation lead to different ways of conducting monetary policy. The Fed is going to taper QE in March and raise the federal funds rate three times. The ECB will slow down asset purchases from €80 billion to €20 billion per month, and the Bank of Japan will continue to fill the economy with cheap money.

USDJPY, EURUSD, GBPJPY, EURGBP, USDCAD and EURCHF trading plan for six months

All this gives rise to differences in the trajectory of the regulators’ balances and creates preconditions for the continuation of the USDJPY uptrend and EURUSD downtrend.

Central bank balance sheet dynamics

Source: Bloomberg.

Curiously, the Bank of England can begin to wind down its balance sheet most quickly. A prerequisite for this is an increase in the interest rate to 0.5%, which may happen as early as February. Expectations of the BoE monetary restriction can push the GBPJPY price up and EURGBP down.

The Bank of Canada has already gotten rid of QE and intends to hike the overnight rate three times in 2022, just like the Fed. This factor allows the loonie to fight for the role of the best performer of the year among the G10 currencies until the very end. I doubt that the 0.7% gap from 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, which was holding back USDCAD bears, has a chance to resume, which will allow the CAD to lead the race.

The Swiss franc may look pretty interesting next year. SNB, which previously adhered to the policy of weakening the CHF, may change its position amid accelerating inflation. It will stop interfering with Forex, which will allow EURCHF to continue its decline.

    

Price chart of USDJPY in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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