Choppy Waters for the Big Forex Trading Pairs

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The forex trading market is known for its characteristic volatility, but the past few months have been simply remarkable. On September 23rd, British Chancellor of the Exchequer Kwasi Kwarteng announced he would – without funding – cut taxes on the wealthy more than they’d been cut in 50 years. In days that followed, the British pound slid to a new low against the dollar, leaving the GBP/USD at 1.10 by October 12th. Kwarteng’s critics accused him of exacerbating UK inflation, which was at one of its worst points in four decades. The backlash against the minister’s plans was so pronounced that Prime Minister Liz Truss had to veto his proposal to eliminate taxes on the highest income bracket just to quell the melee. 

Moving into Europe, in the second week of October, ECB (European Central Bank) President Christine Lagarde insisted “Europe is not in recession”, pointing to the “positive employment situation” as proof. Economists interviewed by Bloomberg disagreed, asserting that the euro zone economy would shrink both in Q4 2022 and Q1 2023, which would constitute a recession. Europe was battling to solve the problem of surging energy costs, spurred by Russia’s turning off gas flows through the Nord Stream pipeline.

On the other side of the well-traded forex pairs has been the US dollar, whose strength has been unchallengeable. Developing economies have suffered as a result, because commodities priced in USD grew pricier and debt payable in dollars became harder to settle. When asked about this issue, US Treasury Secretary Janet Yellen answered that nothing could be done because the USD was being empowered by “appropriate policies”. On the point of Kwarteng’s tax cuts, Yellen sided with his critics because, “at a time when monetary policy is tightening, fiscal policy should have a stance that complements that”. Join us now as we look more closely into what’s been moving three of the most popular forex trading pairs.

GBP/USD

When asked about the slipping of the pound after Kwarteng’s announcement, UK Business Secretary Jacob Rees-Mogg said the culprit was not government economic policy but the Bank of England (BOE), for not hiking interest rates fast enough. On September 22nd, the BOE raised rates by 50 basis points as compared with the US Federal Reserve’s 75 bp hike the previous day. Rees-Mogg said “The pound and other currencies have been falling against the dollar because interest rates in the US have been rising faster than they have in other markets”. Truss’ popularity was waning in October, and the pound kept sliding. On top of this, economic data appearing on October 12th showed that August economic production dropped for the second time in three months, which indicated a recession may have already arrived. The job market, for its part, was strong, and analysts took this as a sign that the BOE could hike rates as much as 1.0% in November.

EUR/USD

It was in July that the euro dropped to parity with the USD, pressured by recession fears, soaring inflation, and doubtful energy supplies. Even then, the slow euro economy made it unclear whether the ECB would be able to hike rates sufficiently to tame inflation. The American currency, with its safe haven appeal, grew more attractive in the field of forex trading, and the event of a recession in Europe or America could enhance that appeal, suggested George Saravelos of Deutsche Bank. 

When October’s third week loomed, it seemed the ECB might have only two more opportunities to hike rates, namely at the meeting later that month and the one in December. “Once recession risks turn into reality and the strains on the economy start to show, it’ll be difficult to push through larger hikes”, explained Karsten Junius of Bank J Safra Sarasin. Lagarde remarked that the onset of a recession wouldn’t change her goal of beating inflation down below its current level of 10% and establishing it at 2%. The IMF (International Monetary Fund) seemed to expect a downturn, lowering their prediction for eurozone growth in 2023 to only 0.5%.

USD/JPY

The US dollar was worth 146.39 Japanese yen on October 12th, which was even weaker than the level of the USD/JPY in 1998 when the Japan intervened to protect her currency. Japan had been sticking to its policy of keeping interest rates low in order to nourish the economy, even though the Fed had been steadily hiking since March. In September, the Ministry of Finance did actually do something to prop up the yen when it paid out $19.6 billion dollars on the forex trading market for that purpose. Japanese businesses have been complaining that official dovish policy has hurt the economy and made the cost of living too high. With the Japanese Prime Minister supporting the central bank’s approach, though, “higher dollar-yen levels are readily justified”, suggested Ray Attrill of National Bank of Australia Ltd.  

Times Ahead

Looking forward to Kwarteng’s strategy announcement on October 31st, Torsten Bell of Resolution Foundation was pessimistic for the pound. “I don’t think there is a plausible credible package that’s going to work on the 31st now that doesn’t involve U-turning”, he said. The EU’s Lagarde was expected to deal out at least two more “significant” hikes, according to Klaas Knot of the Dutch Governing Council, while also trying to foster renewed confidence in Europe’s economy. Therefore, if your sights are set on the forex trading market, it’s essential to keep an eye on both the news headlines as well as your broker’s economic calendar to ensure you have the latest policy info that could send currency prices reeling.