Foreign exchange volatility and poor year for pound expected in 2023

(Alliance News) - Foreign exchange markets will be subject to a wild ride next year, analysts at Deutsche Bank and ING agreed, as they look ahead to 2023.

Unlike this year, where the dollar has clearly been king, trends in the currency market will not be as easily identifiable.

"We still expect a very choppy turn in the dollar next year," Deutsche Bank analysts commented.

The extent and pace at which the dollar ebbs is an unresolved question heading into 2023.

Analysts at the German bank added: "For a big dollar downtrend to kick off, we really need more confidence that US inflation – and by extension Fed Fund pricing - is sustainably coming down. Our favoured market metric to monitor the dollar regime is the shape of the US yield curve.

"The 5-year real rate versus 30-year nominal rate needs to start twist steepening aggressively to kick off a big dollar downtrend – something which is not happening yet."

This year has been famously strong for the dollar. The euro spent much of the summer below parity, but has climbed above it recently after favourable US inflation readings. Sterling has similarly succumbed to dollar strength and hit a record low near the USD1.03 mark in September, following the fallout of a poorly-received mini-budget delivered by ex-UK chancellor Kwasi Kwarteng.

Deutsche expects the euro to close out the year at USD1.05, remaining that way in the middle of 2023, before ending next year at USD1.10. Things will be less bullish for the pound.

Cable is predicted to end at USD1.19 in 2022, fall to USD1,14 in mid-2023, before inching up to USD1.16 at the conclusion of next year.

Analysts at ING similarly expect a comparatively poor year for sterling.

"EUR/USD will set the tone for European currencies in general. We favour the Swiss franc to outperform and sterling to underperform. Scandinavian currencies may continue to struggle with the high volatility environment. Further east, we see scope for the Hungarian forint to be re-assessed positively, while the overvalued Czech koruna and Romania leu look more vulnerable as FX intervention slows," analysts at the Dutch bank commented.

"In the commodity bloc, the uncertain outcome for China continues to place a question mark on the Australian and New Zealand dollars. We again prefer the Canadian dollar – although how the housing market correction plays out will be a risk."

Late on Thursday, the pound was quoted at USD1.1883, down a touch from USD1.1891 late Tuesday. The euro traded at USD1.0365, down from USD1.0385 late Tuesday.

ING set out a series of forecasts for the euro in 2023, ranging from a "permacrisis" outcome to a "safe and sound" result.

Should the worst happen, ING expects the single currency to end 2023 at USD0.80, though its best-case scenario is USD1.18.

With a "glass half full" approach, it predicts the euro to trade at USD1.10 at the end of 2023. ING's house view, however, is labelled as "the pain is not over" a notch above "permacrisis" but below the half-full glass.

In its house view, ING expects the euro to trade at parity at the end of 2023.

ING summarised: "But perhaps the strongest message to get across in our outlook is that FX markets in 2023 will see fewer trends and more volatility. We say this because conditions do not look to be in place for a clean dollar trend – no 'risk-on' dollar decline nor 'risk-off' dollar rally. And central banks tightening liquidity conditions through higher policy rates and shrinking balance sheets will only exacerbate the liquidity problems already present in financial markets. Volatility will stay high."

By Eric Cunha; [email protected]

Copyright 2022 Alliance News Limited. All Rights Reserved.