2023 Predictions: Euro could trade back below parity at some point during the first half versus the USD, but may firm up later in the year once the Fed is eventually seen as beginning to soften its own stance
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We're pleased to deliver our readers with 2023 predictions for currencies and Forex prepared by John J. Hardy, Head of FX Strategy at Saxo Bank. Let's take a look at his views on euro, pound and more.
What do you expect from euro and pound in 2023?
We ended 2022 with the euro riding high on the ECB's late-to-the-game hawkishness at the December 15 ECB meeting. But 2023 will see the ECB having a hard time delivering as much as the market is now expecting without getting aggravating peripheral spreads and bringing into question the degree to which the ECB can really achieve meaningful quantitative tightening, much less hiking the rate beyond perhaps 3.00%. Euro could trade back below parity at some point during the first half versus the US dollar, but may firm up later in the year once the Fed is eventually seen as beginning to soften its own stance as a recession is likely on the way in late 2023 or early 2024 (later than the market expects - data could prove far more resilient from the US than the market expects for much of this year). The outlook for the UK is far weaker due to the austerity programme of the new Sunak-Hunt government, so a meaningful weakening in sterling is a risk for the first half of the year in particular. One huge uncertainty in general and in particular for Europe is the price of oil and especially natural gas and the availability heading into next winter as the Russia-Ukraine war grinds on and with Chinese demand returning as it will fully open up its economy after the Chinese New Year, after which the Covid outbreak there will have hopefully largely run its course.
What can we expect from EUR/USD, CHF/USD, USD/JPY, CNY/USD? What macroeconomic and geopolitical factors will be crucial for currencies in 2023?
Some of these are mentioned above: the return of Chinese demand post Lunar New Year (early this year on January 23) and post-Covid impacts, the energy situation and war in Europe, and in the US, whether we see a more resilient US economy and stickier inflation from a tight jobs market than the market expects, with recession there coming far later than currently anticipated (as late as early 2024). This could mean far higher yields and another round of US dollar strength before the Fed can afford to ease up on its tightening regime. So while the US dollar may end the year a bit lower, there may be room for another significant rally in the first half of the year and plenty of volatility.
What macroeconomic and geopolitical factors will be crucial for the dollar in 2023?
US-China relations, Another random issue that will presumably be resolved before too much damage is done, but needs watching, is the "debt ceiling" issue in the US, which will be reached sometime in the spring/early summer time frame and must be raised to allow orderly functioning of US treasury markets and even the US economy ultimately.
