How did 2021 Impact the Currency Market?

Pound (GBP)  

The Pound (GBP) started 2021 as one of the best performing major currencies due to Brexit trade deal relief and the UK’s impressive Covid vaccination rollout, before Sterling’s rally faded in the summer on delayed lockdown easing in the UK, the emergence of the Delta variant, and UK-EU post-Brexit tensions. 

Going into the fourth quarter, the Pound experienced volatility as fears grew in the UK economy of ‘stagflation’ – soaring inflation and slowing economic growth – but Bank of England (BoE) policymakers signalled an imminent rate hike.  

An interest rate did come but not in November as expected. Instead, the BoE shocked markets by waiting until December to raise rates to 0.25%, amid uncertainty over the Omicron variant, but cited alarmingly high inflation and a strong UK job market as reason for the timing. 

The BoE’s cycle of raising interest rates will be a key driver in the Pound in 2022, while record high UK Covid-19 cases, the threat of restrictions, Omicron uncertainty, and high inflation lingering until later in the year will also be major catalysts. 

Euro (EUR)  

The Euro (EUR) declined through 2021 after starting the year on solid footing. The Eurozone’s slow vaccine rollout and strict Covid-19 measures in many European countries dented EUR sentiment early in the first quarter. 

The perceived contrast in monetary policy from the European Central Bank (ECB) compared to the Federal Reserve and the BoE also drove the Euro lower through the second half of the year. The ECB maintained its loose policy stance while the Fed and BoE made moves to tighten monetary policy. 

The fourth wave of coronavirus hitting Europe heaped more pressure on the single currency at the end of the year, with cases soaring to record highs and countries having to reimpose restrictions across the Eurozone. 

Uncertainty over the Omicron variant and impact of restrictions on Eurozone economic activity look set to dampen the Euro early in 2022. Meanwhile, with the ECB repeatedly reiterating that inflation is ‘transitory’, rates will likely remain at 0% through 2022, and signalling increased asset purchasing may also stoke EUR volatility through the year. 

US Dollar (USD)  

The US Dollar (USD) has ended 2021 outperforming the Pound and Euro after struggling at the start of the year amid broad risk-on trade fuelled by stimulus announced by the new Biden administration and accommodative policy from the Federal Reserve that limited safe-haven demand for USD. 

Souring market sentiment supported the US Dollar in the second half of the year as worldwide Covid-19 cases surged to dampen the global growth outlook and soaring inflation concerned markets.  

At the same time, the Federal Reserve responded to surging inflation and an improving US job market later in the year by announcing an acceleration of tapering its bond-buying programme, with investors beginning to price in a rate hike around March 2022. 

Looking ahead, concerns over global growth forecasts due to the spread of the Omicron variant around the world and fears of a slowdown in China’s economic growth could cause safe-haven demand for USD. How aggressively the Fed tightens its monetary policy will also drive significant movement in the US Dollar. 

Canadian Dollar (CAD)  

The oil-sensitive Canadian Dollar (CAD) received significant support through 2021 from soaring crude WTI crude prices that were up around 57% by the end of the year at $76.5 a barrel, the biggest gains in 12 years. Energy demand surged as restrictions eased and travel resumed, with prices peaking at $83 a barrel in the autumn. 

Signs of a strong Canadian economic recovery was enough for the Bank of Canada (BoC) to be the first major central bank to signal removing stimulus in April, and ended its bond-buying programme in the autumn while hinting at accelerating its tightening cycle. 

Signals of tighter monetary policy has provided the Canadian Dollar support and looks set to continue driving movement in 2022, with the first rate hike as soon as April and investors expecting up to five rate rises next year. 

Australian Dollar (AUD)  

The Australian Dollar (AUD) started 2021 on the front foot as an upbeat global market mood supported the risk-sensitive ‘Aussie’ through the first part of the year. 

The Reserve Bank of Australia’s (RBA) policy stance stoked volatility in the Australian Dollar for much of the year, with the central bank reiterating a rate hike is unlikely until 2024. The RBA announced a surprise expansion of its quantitative easing (QE) programme early in the year and maintained a loose monetary policy stance through much of 2021 despite aggressive investor AUD pricing on expectations for tightening policy. 

Through the second half of the year the ‘Aussie’ retreated from its higher levels as concerns emerged over global economic growth, and a slowdown in Chinese economic activity. Fears over contagion from the Evergrande crisis sparking an equity market selloff weighed on AUD sentiment, but a record low unemployment rate and strong economic data provided some support. 

Looking ahead, global growth forecasts and market risk appetite look set to be a key driver in the Australian Dollar in 2022 as countries again emerge from another wave of coronavirus, while commodity demand of Australian exports will add volatility. 

New Zealand Dollar (NZD)  

The New Zealand Dollar (NZD) benefitted from increased market risk appetite early in 2021 and New Zealand’s low coronavirus case rate, before souring market sentiment and rising infections in the country weighed on the ‘Kiwi’ in the second half of the year. 

However, after struggling through the summer, the New Zealand Dollar received renewed support going into the third quarter. Unemployment fell to a record low 3.4% and the Reserve Bank of New Zealand (RBNZ) became the first major central bank to raise interest rates, and hiked rates for a second time in November.  

After experiencing a spike of coronavirus cases in the fourth quarter, the threat of the Omicron variant spreading in New Zealand looks set to drive movement in NZD at the start of 2022. More rate hikes from the RBNZ will also likely support the New Zealand Dollar as the central bank looks to bring inflation down to its 2% target over the next couple of years. 

Andrew Roberts

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