The first week of the new trading year is almost at an end. As economists set out their predictions for the year ahead, we are starting to get a clearer picture as to how this year is expected to play out. If the analysts are to be believed, it will be another year of extreme volatility within the currency markets. A new king may rule the roost this year, as the Fed is expected to start slowing down their interest hikes, by the middle of the year. We expect to see GBP, EUR, and JPY make the biggest recovery against USD by the end of the year.

As with anything, in the currency markets, there are a considerable number of mitigating factors. Inflation is yet again expected to be the main indicator of how well a currency performs. With interest rates being raised consistently around the globe, for the most part of last year, it is expected that inflationary pressures will begin to ease in most of the G7, by the first few months of this year. The US is expected to be the first to see this shift in its economy. Although this may be good for the consumer and overall economic health, the effect on the currency markets may be the opposite. As central banks begin to slow down their base rate hikes, investors will likely put their money into currencies with higher inflation and ongoing interest rate hikes, as they look to profit from higher base rates. This could be good news for the GBP, with the FT reporting that they are expecting the UK to have the longest and deepest recession of the G7, with inflation expected to continue rising long after its rivals have begun to suppress it. The Sterling is still expected to underperform massively in the opening months of the year, with GBP/EUR expected to fall towards 1.10 and GBP/USD towards 1.13.

Yesterday’s US Non-Farm Employment Change figures came in 53k better than expected, seeing USD retract recent gains from the Sterling. Today’s full US employment figures will be monitored closely by traders, as they will give a clear indication of the overall strength of the labour market in the US. Continued strong readings will see further gains for the greenback. Overall, this year will be plagued by the same problems as last year for the UK, the Ukraine war, inflation, BOE decision-making, and political uncertainty set to take centre stage yet again.