2021 marked an outstanding year for the US dollar as it rallied against all other majors clocking up a tidy 10% gain against the Japanese Yen and brushing off pandemic fears. But as inflation rears its ugly head the dollar could be in for some choppy sessions whilst the FED and the rest of the worlds Central Banks draw up new policies to tackle soaring prices and stagnant wages. 2022 also bring politics back into the spotlight, with the French presidential election set to shape the future of the Eurozone whilst the US midterms could bring instability and show how fragile democracy can be in the mists of a global pandemic presenting China opportunity to assert itself as a global leader.
Let’s look into the specifics.
USA / Dollar – Bullish
The US dollar remained on top in 2021 with a 10% gain against the Japanese yen. Whilst there were no interest rate hikes to end the year the FED confirmed its asset purchasing program – used to support the economy during the pandemic – would be coming to an end. Once complete the FED will very likely begin to raise interest rates accordingly and they will be needed to curb the soaring inflation numbers from December which saw prices rising 6.8% on the year – the biggest increase for nearly four decades. The dollar will beat major currencies whose central banks are refusing to raise interest rates such as the Euro, Swiss Franc and Japanese Yen but inflation is a wildcard.
In one instance it pushes the FED to hike interest rates and with a strong labour maker and consumer spending they can do so comfortably. With reduced government spending and predicted slow global economic growth this is a bullish scenario for the dollar. However, should inflation begin to cool later in the year with energy prices and supply lines correcting the markets may dial back their expectations and question the need for powerful rate rises.
As mentioned above politics will once again take center stage in the USA with the Mid-term election. It looks increasingly likely that the Republicans will take control of both chambers of Congress splitting the Governments power and dividing the country. If this happens, we can expect reduced spending, a cooldown on yields and by extension a reduction in the dollar’s interest-rate advantage. We may also see an increase in protests and riots allowing China to test US global leadership but asserting that their autocratic system is far superior to democracy. Russia also remains a problem with the potential for conflict in Ukraine.
In summary, the first half of the year looks strong for the dollar but uncertainty around inflation and elections may cause heavy volatility in the latter half.
Europe / EURO – Bearish
Europe looks set for a weaker start to the year compared to the US with a fragile economy and increased restrictions due to Omicron, growth doesn’t look great for the single currency zone. Wages have remained stagnant which will increase inflationary pressures on the zone. The ECB is still holding the line and confirmed there will be no interest rate hikes this year whilst asset purchasing will continue. Euro inflation rates are nearly half of that in the US but the ECB’s stance will likely mean the Euro is left behind whilst other central banks crank up rates multiple times. The France Presidential elections also take place within the first half of the year in April and it is widely expected to be a contentious event with President Macron struggling to maintain power. A change of government will see new monetary and fiscal policies implemented
The second half of the year may be better for the Euro if inflation is truly “transitionary” as President Christine Lagarde believes. If US inflation peaks and coincides with a strong European labour market and wage increases then the Euro may outperform its peers.
In summary, the Euro looks weaker in the first half of this year but may bounce back stronger in the second half.
United Kingdom / GBP – Neutral
After a relatively strong year for GBP, the markets were surprised with an early Christmas gift from the Bank of England – an interest rate hike and confirmation of three more to come by the end of 2022. The year has already started strong for Sterling but this is likely due to markets already pricing in the future rate hikes. Overall the economy is doing well but Brexit, political scandals and Covid are still looming.
GBP has had a correlation with risk sentiment over the past year and this trend looks set to continue into 2022. Stock market performance can easily affect GBP and a strong currency can also signal risk for investors looking to reduce their exposure in volatile periods. For the UK it’s a fine balance maintaining its status and role as a global investment hub for the world after Brexit and whilst continuing to run up a “twin deficit”.
Staying open to the world also brings the risk of Covid cases and is one of the reasons why the government implemented lighter restrictions compared to its European counterparts which kept the economy bubbling over the busy holiday period. Confirmation that Omicron is indeed much less severe means the gamble paid off but uncertainty means risk and Sterling will be susceptible to market volatility.
To summarise Sterling looks set for a strong start to the year but monetary and fiscal policy looks unlikely to have an impact on performance instead the fate of Sterling is left to global market sentiment.
What else is in store for 2022?
There are 4 key areas investors should keep an eye on in 2022.
China
The rise of China will continue to dominate foreign policy as Xi Jinping continues to test US global leadership. How this will play is unknown but tariff and trade wars like we have seen before can create volatility for the globe and financial markets
Hybrid working becomes the new norm
Working from home has become the new norm since the start of the pandemic and this trend looks set to continue. The struggle to find the happy medium between employers and employees will add further fuel to the “Great Resignation” but also provide an opportunity for those who prefer to be present in the office.
The Metaverse
The solution to co-working remotely or just another bubble? Meta formerly known as Facebook has already invested $10 billion into the space and there are many more jumping onto the bandwagon. Blockchain technology easily interrogates the metaverse and provides speculative opportunities for risk on investments. Adidas has partnered with The Sandbox to create the “adiVerse” whilst competitor metaverse Decentraland sold a piece of digital land for a whopping $2.5millon.
Space Race 2.0
The space race is back nearly 50 years since the moon landing. China will complete its very own space station after being banned from the ISS which is set to be decommissioned in 2024. India is also joining the race and will take a second attempt to land a rover on the moon this year, but this is a more patriotic gesture than pushing the final frontier. Instead, it’s down to 3 competitive billionaires – Musk, Bezo & Brandon – who will be bringing space tourism to the people (albeit very rich people) and in the case of Elon Musk working directly with NASA to push the boundaries of space travel.