Pound (GBP) Plagued by Cost of Living Crisis and Political Turmoil
The Pound (GBP) faced significant pressure through 2022. Inflationary pressures within the UK proved to be particularly strong. The resulting cost of living crisis acted as a key headwind for Sterling through the year.
Political woes also plagued the pound though the second half of the year. The uncertainty of Boris Johnson’s premiership gave way to the even more tumultuous Liz Truss administration, which lasted only 45 days after her disastrous mini-budget sent the GBP/USD exchange rate plummeting to a record low.
While Rishi Sunak has done his best to restore the UK’s fiscal credibility, the Pound has also suffered as a result of the UK economy’s poor performance and gloomy outlook. Which offset several interest rate hikes from the Bank of England (BoE).
Euro (EUR) Undermined by War in Europe
The Euro took a dramatic hit in February 2022 as Russia invaded Ukraine. The conflict prompted sharp losses in the single currency amid concerns over the impact it would have on the Eurozone economy as it sent European energy prices skyrocketing.
The Euro also suffered as a result of its negative correlation with the US Dollar as the latter soared. The EUR/USD exchange rate even trading below parity at several points throughout the year.
A hawkish pivot from the European Central Bank (ECB) provided support to the Euro through the second half of 2022. After some initial reluctance to join its peers in tightening its policy. The latter half of the year saw several aggressive hikes from the ECB, with policymakers promising that more were to come.
US Dollar (USD) Soars thanks to Aggressive Fed
The US Dollar (USD) was clearly 2022’s best performing major currency. The ‘Greenback’ enjoyed a bullish run through the majority of the year, which saw it sail past parity with the Euro and strike a record high against the Pound.
A series of aggressive interest rate hikes from the Federal Reserve acted as key pillar of support for the US Dollar in 2022. Particularly as its bumper increases stoked global recession fears, reinforcing demand for the safe-haven currency.
While the US Dollar’s momentum began to fade toward the end of the year as USD investors scaled back their Fed rate hike bets amid signs that US inflation had peaked, it still closed the year up against almost all of its peers.
Canadian Dollar (CAD) Rises and Falls amid Oil Price Volatility
The Canadian Dollar (CAD) enjoyed strong support through the first half of the year. The commodity-linked currency rose in tandem with oil prices following Russia’s invasion of Ukraine.
However the ‘Loonie’ then faced headwinds around the middle of the year after crude prices began to retreat again as recession fears and a slowdown in Chinese economic activity began to weigh on forecasts for global demand.
Six interest rate hikes from the Bank of Canada (BoC) over the course of the year lent some support to the Canadian Dollar. But the BoC then began to slow the pace of these hikes toward the end of 2022, further robbing the Canadian Dollar of support in the second half of the year.
Australian Dollar (AUD) Undermined by China’s Covid Woes
The Australian Dollar (AUD) trended broadly lower in 2022. A strong US Dollar and predominately risk-off mood weighing on the risk-sensitive currency throughout the year.
The ‘Aussie’ was also undermined due to Australia’s ties to China. The world’s second-largest economy struggled in 2022 as the country’s ‘zero Covid’ policies severely limited economic activity. China strengthened many of its lockdown measures in April which added to AUD’s woes.
On the other hand, the Reserve Bank of Australia (RBA) raised interest rates to 3.1% this year. The path of policy tightening helped to temper losses for the ‘Aussie’.
New Zealand Dollar (NZD) Faces Risk-Off Headwinds
The New Zealand Dollar (NZD) fell against most of its peers throughout 2022. The ‘Kiwi’ suffered due to limited risk appetite as well as its positive correlation to the Australian Dollar. Weak domestic data also weighed on the currency, as business confidence slumped in the face of high inflation. Strong third quarter growth figures helped NZD to recover some of its losses, however.
A surprisingly hawkish path of policy tightening from the Reserve Bank of New Zealand (RBNZ) helped to limit losses for the New Zealand Dollar, however. The central bank raised interest rates to their highest level in over a decade.