Traders have grown accustomed to low volatility in the FX market, and one might even say a bit nonchalant. It is for this reason that 2022 seems to be catching traders by surprise, with a series of events keeping them on edge. Inflation is now a global phenomenon and, combined with rising political tensions, market participants are switching from one currency to another frequently, depending on changing risk sentiment.
Those who are interested in forex trading are bound to face a series of challenges in the months ahead, especially if global growth continues to disappoint, at a time when fiscal and monetary support is gradually removed.
Alt-text: update on the currency market 2022
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Russia Ukraine tensions favor a flight to safety
However, the spotlight is now on the developments in Eastern Europe, where tensions are growing between Russia and Ukraine. Financial markets are reacting impulsively to any negative headline on the topic. Thus far, the Yen has been the major currency favored by the events, probably due to Japan’s physical and psychological distance from this whole mess.
It rose against most of its peers, mainly thanks to the safe-haven status. For the first half of February, the Yen is shining and should continue to do so, unless things take an unexpected turn. So far, diplomatic talks continue, but tensions are expected to remain elevated since the chance of both sides meeting halfway are very slim.
USD remains bid on FED hikes prospects
Another currency that’s currently posting attractive gains is the US Dollar. Inflation is rising at an accelerated pace, with the latest CPI figure reaching 7.5%, exceeding what analysts expected. On the back of a tight labor market, high consumer prices, and strong economic growth figures, the Federal Reserve is now expected to tighten its monetary policy.
Asset purchases will end in March, which is when the first rate hike is also expected. Futures markets are currently pricing a 66% probability for a 50 basis points increase, a more aggressive move that could show FED’s commitment to taming inflation pressures.
Despite these rate hike expectations, the FOMC has been sending rather mixed signals. Governors have divergent opinions, which means the chances of a bold move at the March meeting are not so high, which eases tensions on the USD.
Euro recovers on hawkish tilt by the ECB
The Euro managed to rebound from the lows after the last ECB meeting. Even though the central bank does not want to raise rates, despite persistently high inflation in the Euro Zone, investors are incentivized by Christine Lagarde’s hawkish comments.
In light of that, futures markets priced in a higher probability for a 10 basis points hike at the June meeting – a scenario that probably won’t materialize, given that the ECB believes such a move won’t happen until after the asset purchase period.
Compared to the Yen, the Euro is wobbly, as political tensions also weigh in on currency exchange rates. Elevated volatility should persist in the following months, given that central banks might choose to stay behind the curve and not live up to the current expectations for aggressive monetary tightening.
