FX volatility picked up in the second half of January as geopolitical risks mounted and rates markets began to adjust to expectations of more aggressive tightening cycles within the G10 space. The most disruptive repricing occurred in US rates after the January Federal Reserve meeting, which the US central bank used to set up a March rate hike following supportive labour market and inflation data. Despite the level of volatility in FX markets and the dollar’s rally towards the latter part of the month, our near-term January forecasts remained accurate. This was due to the marginal bullish adjustment in our USD forecasts at the start of the year and the lower USD base from where the dollar rally commenced mid-month. Looking ahead, we expect the dollar’s strength to be more nuanced in February and for it to be isolated against currencies where rates are likely to lag the rise in US rates. In our forecasts, this largely pertains to EUR, JPY and CNY. However, against other currencies, we expect the dollar to start weakening at the margin as the adjustment in US rates markets stabilise around the 5 rate hike outlook currently priced in.
You can read our February 2022 FX Forecasts report here:
Simon Harvey, Head of FX Analysis
Ima Sammani, FX Market Analyst