2023 FX Market Preview: Every Country And Economic Area In The G10 Will Continue To Experience An Inflation Overshoot Through The End Of 2023

But what can we expect in the FX market in the next twelve months? Below, we outline our main calls for the coming year, providing an overview of the factors that we believe could have the most significant impact on currencies in 2023.
We have finally begun to see signs of an easing in price pressures in the past few months, suggesting that we may have seen the peak in inflation, at least in the short- and medium-term. Recent inflation prints have started to come in below both economists’ expectations, as represented by a sharp drop in Citigroups’s Inflation Surprise indices, and their respective peaks. This has been particularly evident in the US, where the CPI reports for both October and November came in well below projections.
Much of these softer inflation prints can be attributed to the recent drop in energy prices. Core inflation rates, which strip out volatile components such as food and energy, remain elevated and have not yet shown any real signs of trending downwards in most cases. This will be key for central bank policy in 2023.
Figure 1: Citigroup Inflation Surprise Indices (2012 - 2022)
Source: Refinitiv Datastream Date: 04/01/2023
If peaks in inflation rates haven’t already materialised, we believe that these will emerge in early-2023, in large part due to the below:
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We believe that a normalisation in inflationary pressures will likely be a gradual process, and the return to central bank targets remains some way off. According to the IMF’s most recent projections, every country and economic area in the G10, with the exception of Japan (-0.6%), will continue to experience an inflation overshoot through the end of 2023. In some instances, most notably the UK (+7.0%) and Sweden (+6.4%), this gap is expected to remain significant, though we believe that these estimates may soon be revised downwards. We suspect that China's reopening will be an important factor for inflation rates this year, as an increase in activity in the world's second-largest economy would likely present an upside risk to prices.
Written by: Enrique Diaz-Alvarez, Matthew Ryan (CFA), Roman Ziruk, Itsaso Apezteguia, Eduardo Moutinho, Michal Jozwiak – Ebury’s Market Analysts
Source: 2023 FX Market Preview: Is a global recession on the way? (ebury.com)