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However, the dollar's recovery in 2022 is far from certain due to global economic healing. Let's look deeper into this year's US dollar news and see where a USD estimate for 2022 could lead us. This article will help you decide whether to buy USDC or another cryptocurrency this year or invest in other traditional assets.

2022 USD forecast

USD struggled throughout 2020 and the first half of 2021.

However, with positive labor data and an expanding economy, several things could favorably affect a US dollar projection. However, the combination of economic depression and inflation concerns ensures that uncertainty persists. Let's take a glimpse at some of the determining elements.

The Federal Reserve and Monetary Policy

The Federal Reserve (Fed) has maintained a relatively loose monetary policy throughout the pandemic. However, the central bank has been forced to taper quantitative easing, with the November Consumer Price Index reporting a 6.2% increase (the highest inflation increase in more than 30 years).

Before delving into recent events, consider the monetary policy narrative of the last year.

During the worst pandemic, the US Federal Reserve reduced interest rates to a record low of 0% to 0.25%. It launched a quantitative easing program, purchasing $120 billion (£89 billion) in monthly bonds. The US dollar weakened in 2020 due to the Fed's ultra-easy monetary policies.

The Fed raised its growth forecast in early June, stating that two interest rate hikes were probable in 2023. It did not expect any rate hikes in 2023, instead anticipating the first increase in interest rates in 2024 at the initial meeting. As a result of the statement, markets rallied, with the US dollar seeing its most significant one-day gain since March 2020.

The Fed repeated in early August that while inflation remains low, interest rates would not be raised until 2023. Despite recent CPI statistics indicating the most significant inflation increases in decades, the Fed has since reversed its attitude.

In response to the inflation increase, Wells Fargo senior economist Sam Bullard stated that the supply disruptions and the recovery of services offer a considerable concern that higher-than-expected inflation may endure for longer than the Fed believes.

Moreover, he continued that they expect goods inflation to pass the baton to services over the next year. However, the supply chain constraints will continue to feed the flames of inflation in the short term.

The December Federal Reserve Update

The Fed stated on December 15th that while interest rate hikes would be delayed until labor market conditions "had reached levels sustained with the Committee's assessments of optimum employment," net asset purchases would be reduced by $20 billion for Treasury securities and $10 billion for agency mortgage-backed equities per month beginning in January.

Forecast for the US currency in 2022: Rising retail sales

According to the US Commerce Department, retail sales in the United States exceeded estimates in October. Inflation did not affect consumer spending in the United States, as sales increased by 1.7%, much beyond economists' expectations.

When comparing October to September, department store sales were up 2.2%, electronics sales increased 3.8%, and internet shop sales increased 4%. While these data provide solid evidence that the US economy is improving, it is crucial to highlight that higher levels of inflation skew sales figures.

Since inflation rose 0.9% in October, rising prices can account for roughly half of the increases.

Final thoughts

Despite ongoing uncertainties and continued volatility, there are numerous reasons to be optimistic about the US dollar.

The dollar's bullish feelings could last into the new year with a robust economic recovery pace, monetary tightening to address serious inflation issues, and solid employment figures.

 

If there's one thing that makes the process of investing decidedly complex, it's the constantly changing macroeconomic climate. This includes a number of individual aspects such as inflation and interest rates, and when combined they can have a cumulative impact on numerous assets and investment types.

Inflation is a particularly interesting macroeconomic factor, and one that tends to move independently to the value of the pound and the base interest rate.

Below Finance Monthly looks at the value of the pound against inflation during the course of the last 20 years or so, and ask how this should influence your investment choices in the near-term.

The Pound vs. Inflation – An Unbalanced Relationship

In simple terms, inflation has increased at a disproportionate rate to the pound over the course of the last two decades or more. More specifically, last years' prices were an estimated 303.3% higher than those recorded in 1980, meaning that 37 years ago £100 would have had the equivalent purchasing power of £403.34 in 2017.

Conversely, the pound itself has moved within a far narrower range during since the late 1980s and early 1990s, against a host of other major currencies. The GBP: USD has reached a peak 2.04 during this time, for example, while slumping to a low of 1.24 in January of last year. This trend is replicated across both the Australian Dollar and the Japanese Yen, while the pound has traded within an even more restricted range against the Euro since the 1990s.

From this, we can see that inflation and the cost of living has fluctuated far more noticeably than the underlying value of the pound, making it a particularly influence and volatile macroeconomic factor. This is an important point for investors to consider, as they must factor in the prevailing rate

of inflation and future forecasts to ensure that they build a viable trading portfolio.

Stocks vs. Bonds in the Current Macroeconomic Climate

To understand this further, let's compare the viability to stocks and bonds in the current, macroeconomic climate. In general terms, bonds are considered as more stable investment vehicles that are ideal for risk-averse investors, while stocks carry the burden of ownership for traders and are capable of delivering higher returns.

With inflation remaining high at around 3% in February (well beyond the Bank of England's target of 2%), however, bonds would appear to represent a better option in the current climate. This is because higher inflation can squeeze household incomes, lowering consumer confidence and spending in the process. As a result of this, both the economy and individual shares in the UK have the potential to be adversely affected in the short-term, while it's difficult to determine when inflation will return to a more manageable level.

Additionally, high inflation can also impact corporate profits through higher input cost, which can in turn lower share values and create negative sentiment within the stock market.

If this does happen, investors could well flock to defensive assets that are relatively risk-averse, particularly if inflation is expected to remain well above the BoE's 2% target throughout 2018. While further interest rate increases could reverse this trend, it's unlikely that the BoE will implement more than one hike this year if the current climate of uncertainty remains unchanged.

The Last Word

Of course, the economy and macroeconomic climate is a fluid entity, and one that could change considerably over the next few months.

Still, the spectre of high inflation is sure to be impacting on the decisions of investors and wealth management firms, as they look to diversify and optimise the returns of their clients in a challenging climate. This includes firms like W H Ireland, who are looking to build on recent growth and continue to thrive amid slower stock market activity and increasingly stained economic conditions.

So, while bonds may not be the most glamorous of asset classes, they offer genuine stability in the current marketplace.

Discussing the latest on stock markets, currencies and the news that Carillion will be heading into liquidation, Rebecca O’Keeffe, Head of Investment at interactive investor talks to Finance Monthly below.

The strength of sterling and the euro are seeing European stock markets fall slightly, as currency gains cap equity valuations. Sterling has been riding high both on the basis of a weaker US dollar and expectations of a softer Brexit than previously forecast. These currency moves are having a mixed effect on big corporates in the UK, where dollar weakness has given commodity prices a further boost with the big miners benefiting, while other big global companies are falling on the basis of lower dollar profits when converted back into sterling.

The government’s decision to walk away from Carillion appears to be based on optics rather than logic and looks like the wrong decision was made for the wrong reasons. There is no doubt that Carillion posed a huge political challenge for the government, which did not want to be seen to bail out another group of private shareholders and banks after suffering such a backlash from their decisions during the financial crisis. However, the prospect of the government temporarily funding existing Carillion public service contracts, alongside the likely increase in costs for renegotiating contracts with new suppliers, make it highly likely that they could ultimately pay far more than if they had provided the guarantees that Carillion’s creditors needed. It is far from clear at this stage what the wider implications will be from the liquidation of Carillion, both in terms of its impact on the construction industry and on the wider economy as a whole, not least from the enormous uncertainty that now afflicts the tens of thousands of Carillion staff and those other companies directly dependent upon it.

Below Kathleen Brooks, Research Director at City Index, provides commentary on the latest bitcoin affairs.

Bitcoin is recovering from one almighty correction last week where it dropped from a high of $7,882 to a low of $5,605 in just three days. That is a drop of nearly 30%, which is technically bear market territory. However, this is Bitcoin and due to this it doesn’t react the way other asset classes do. At the start of this week Bitcoin is up $1,000, and has retraced nearly 50% of last week’s decline.

Factors that drove last week’s decline in Bitcoin included:

Looking at the factors that may have driven Bitcoin’s sell off, most appear short term, and indeed, the sharp bounce back on Monday suggests that traders are using any dip as a buying opportunity.

So, where could Bitcoin go next?

This is a tough one to answer as Bitcoin appears to be a runaway train overcoming any obstacle thrown in its path. From a technical perspective, there is nothing to stop Bitcoin hitting $10,000 per USD (see chart 1), as long as we close above $6,500 today. Usually when a price moves through a big psychological level it continues to move higher rather than pausing or reversing course, thus $10,000 could the start of life above 5-figures for Bitcoin bulls. Thus, any future sell offs, and we warn you that they can be severe, could be used as further buying opportunities.

Perhaps the biggest challenge for Bitcoin will come when volatility elsewhere starts to rise. If the Vix was to surge like it did back in late 2015/ early 2016, then traders may lose interest in Bitcoin and pile into other fast-moving asset prices. However, for pure speed and adrenalin, nothing beats bitcoin’s price movements right now. It’s great if you can pick up on the dip and ride the wave higher, but it is not for the faint-hearted.

Source: City Index and Bloomberg

With socio-political uncertainty reigning the decisions of businesses and banks, currency fluctuation is unpredictable and both the USD and GBP have been undergoing copius periods of pressure. Here Bodhi Ganguli, Lead Economist at Dun & Bradstreet gives Finance Monthly an updated run down on the currencies and their status moving forward.

An investigation of the movements in the dollar-pound exchange rate needs to balance short run fluctuations against the medium to long term fundamentals. While day-to-day volatility in the currencies can produce financial gains for a subset of finance professionals like currency traders, the underlying trends in the exchange rate are far more important for the overall growth of the two economies, and eventually of more significance to businesses.

Note that the USD-GBP exchange rate is a “relative price”, or in other words, it is the price of one currency in terms of the other currency. As such, all movements in the exchange rate are relative to each other. Therefore, factors that have an impact on either the USD only, or the GBP only, will end up producing fluctuations in the exchange rate. The latest phase of weakening in the GBP relative to the USD began in earnest after the Brexit referendum in June 2016. The UK’s decision to exit the EU was seen as detrimental to growth in the near to medium term, causing erosion of investor confidence in the GBP. The immediate reaction was a slump in the relative price of the GBP; in less than a month the value of the GBP fell from USD1.45 to USD1.30 or nearly an 11% depreciation in the sterling. Since then, the GBP has lost even more ground vis-à-vis the USD.

The USD’s behavior over the last couple of years was also a factor behind the post-Brexit slump in the GBP. The drop in the pound happened to coincide with one of the strongest phases of the dollar in recent history. Against the currencies of a broad group of major US trading partners, the USD started appreciating sharply and steadily in mid-2014, and by the time of the Brexit vote in June 2016, it was already 18% stronger compared with July 2014. Since then, the USD gained even more thanks to investor optimism following the election of the Trump government.

More recent trends in the USD and GBP offer clues to the near-term movement of the exchange rate. The pound will remain under pressure during the course of the Brexit negotiations that have just commenced primarily because there is significant uncertainty associated with them. Brexit remains a systemic risk that will weigh on growth in the near term. More importantly, investor sentiment will be subject to frequent changes until Brexit is complete and any perceived increase in risks will weigh on the pound. This will tilt the exchange rate in favor of the USD, also, partly because the USD is a safe haven currency that investors flock to whenever there is an increase in geopolitical uncertainty. Over the longer run, we expect the pound to weaken modestly against the euro (the currency of the UK's most important trading partner) until 2021, but this assessment assumes that elections on the continent will be won by pro-European parties and the Greek debt crisis will not return. Against the dollar, a very modest strengthening should set in towards the tail end of this decade but political risk in the wake of the Brexit negotiations has the potential to impact on the exchange rate. In any case, currency volatility will be a bigger issue than in previous years, also caused by political events on both sides of the Atlantic and the Channel.

Monetary policy in the two countries will also be a driver. The US Federal Reserve has already started the process of monetary policy normalization—the only major western central bank that has started raising interest rates from the ultra-accommodative lows necessitated by the Great Recession. On the other hand, the Bank of England launched the latest round of monetary stimulus right after the Brexit referendum and continues to support the economy with record low interest rates. The spread between the US and UK interest rates will also favor the USD, although the USD has its own issues to worry about there. Following the latest rate hike by the Fed in mid-June, the dollar remained relatively subdued. There are two main reasons why the link between a Fed rate hike and dollar appreciation seems broken for now: one, investors are assigning a low probability to aggressive rate hikes by the Fed given the recent weakness in US inflation data, and secondly, while investor optimism is still there, it is now widely accepted that the Trump administration’s fiscal policy measures, like tax reform and deregulation, will not add to US growth in 2017. In fact, implementation risk remains high given the level of disagreement on key issues among Congressional Republicans.

Ironically, while currency weakness fundamentally signals weakness in a country’s economic prospects over the longer run, it could benefit an economy in the short run. This is clearly evident from the gains in manufacturing seen in the UK, thanks to the weakness of the pound. However, there are downside risks from the weak pound, like rising inflation, which will weigh on consumers and prompt the BoE to raise rates. Similarly, no one seems to mind the lackluster reaction of the USD to the Fed rate hike. Manufacturing benefits, corporate profits gain, and even the Fed might not be too worried as the weak dollar will boost inflation and help it stay on track to raise rates. Eventually, of course, economic fundamentals will take over and the exchange rate will reflect the varying economic prospects of the two countries.

With Donald Trump's inauguration, a new, contradictory era of the USD may have begun, points out Innovative Securities' analysis. They remind: in the past decades, presidents refrained from making clear statements about the USD but the new Administration seems to be different and that can lead to a new situation.

Trump and his colleagues expressed concerns about the strength of the dollar or complained about other currencies being undervalued, underlines the analysis, adding: they mentioned the euro, the Japanese yen, the Chinese yuan as well as the Mexican peso. The choice of these countries is not surprising: the US has a trade deficit against them.

According to Trump, these countries devaluate their currencies to be more competitive, and the US must take steps to change the situation, reminds Innovative Securities, mentioning that an OECD survey also points out that the euro is nearly 25% undervalued, the yen is 11% undervalued, while the Mexican peso is undervalued by 147%. Since Trump's inauguration though, peso is constantly strengthening.

But the USD is not only strong because of its trading partners, believes Innovative Securities. The US is still one of the most beneficiary players of globalization and we can see that since 2010 the USD strengthened constantly while trade deficits remained the same or grew. The US also has a huge import demand for its domestic consumption totalling up to 70% of its GDP. Trump's unofficially announced domestic tax cuts, deregulation and infrastructure investments can further strengthen the dollar. Even the desired stronger US economy, different monetary policy and the rising bond yields are favouring the greenback, they add.

The markets recognize the conflicts between the facts (that helps the dollar) and the words (the comments that are negative for the USD), and actions are needed for clearing the picture, says the analysis, adding: in the upcoming months markets will concentrate on the loosened fiscal policy and the evolving inflation which may lead to a lot of bullish mix that supports the dollar in the near future. In the middle term, though, the company expects a turnaround. The contradictions may stay for long, summarizes Innovative Securities, saying: a more volatile market environment may come, where old policies are eliminated while the Trump Administration continuously tries to make verbal interventions in favour of their policies.

(Source: Innovative Securities Web)

Sterling has encountered significant losses in recent days with the increasing support for anti-EU theme from the recent ORB polls conducted regarding the referendum. More than 55% of voters showed their support for leaving EU while only 45% were interested in staying back with EU. The important point to note here is that price action has been driven mostly by change in market sentiments based on results from poll data. The volatility of GBP has consequently increased since the announcement of referendum and has dropped to its lowest levels as last seen in 2008.

GBP has been performing very bad especially against dollar and GBP/USD reached its all-time-low level of around 1.39 during the month of February 2016. It was the time when initial talks about referendum came into picture that caused huge fears among the investors regarding the financial instability of UK. Based on technical analysis from the options market, there is 72 percent chance of GBP/USD pair trading anywhere between 1.32 and 1.51, by June 24th once the results of the referendum are announced. The GBP/EUR exchange rate is meanwhile expected to range between 1.33-1.35 after the voting.

The topic of British Exit from Europe has been discussed for years and became popular during February 2016 after Prime Minister David Cameron promised to conduct a voting for the same by June. Though voting will be held on June 23rd, it will not result in immediate departure of UK from the European Union. It would commence a multi-year negotiation period on the terms for exiting EU.  Based on polls conducted during last few months, there has been mixed results on the majority’s bias with some polls showing minor leads on either side. The below table from Wikipedia shows the results of various polls conducted regarding the referendum,

Date Remain Leave Undecided Sample Size Poll Name
9-10 June 42% 43% 11% 1,671 YouGov
7-10 June 44% 42% 13% 2,009 Opinium
8-9 June 45% 55% n/a 2,052 ORB
5-6 June 43% 42% 11% 2,001 YouGov
3-5 June 43% 48% 9% 2,047 ICM
2-5 June 52% 40% 7% 800 ORB
1-3 June 41% 45% 11% 3,405 YouGov
31 May - 3 June 43%
40%
41%
43%
16%
16%
2,007 Opinium
30 - 31 May 41% 41% 13% 1,735 YouGov
27 - 29 May 42%
44%
45%
47%
15%
9%
1,004 ICM
25 - 29 May 51% 46% 3% 800 ORB

Britain has always remained a semi-detached member of European Union and most of the British bureaucrats believe that they can do better alone. Some of them are frustrated by the fact that EU gets benefited more from the UK than UK from the EU.  The recent economic problems of some EU members like Greece have caused huge disinterest regarding the EU membership among British investors.  Though pound has decreased significantly against USD and the trading is done based on shifting expectations for the referendum, GBP/EUR is showing a longer-than-average bullish day’s range as of June 15th, which is giving a positive outlook for trading GBP. It is an early sign for positive impact on GBP in the currency market, after the steep decline experienced in recent days. The important fact to note here is that Brexit will not only affect GBP, but also Euro.

Based on certain analysis reports, UK leaving the EU could result in loss of more than 950, 000 jobs by 2020 and deficit around £100 billion which is around 5% of their GDP. When looking at possible impacts for each decision, it is important to note that whatever significant ground lost in recent days is likely to be made up relatively fast once the business gets usual after the referendum. But even before voting, many investors are selling GBP as risks are associated more with the decision. If we look at the current account deficit of UK, it clearly indicates that GBP is becoming weaker. UK has a current account deficit of more than 5 times its GDP, which is the worst for any developed nation making this a strong reason for sterling’s weakness in currency market. In the coming days closer to referendum, we can expect to see sterling respond less to economic reports of UK and trade based on Brexit-related updates.

Any pro-Brexit pool can result in further decline of GBP and anti-Brexit news could cause an upward trend on GBP. If the Brexit vote becomes positive and pound hits the lows, it will be a good time to buy GBP as it will definitely bounce back after some time. The Bank of England might come for rescue by announcing interest rate hike to generate a positive sentiment among the investors. Euro will also face downward pressure, if the Brexit vote becomes positive and is already witnessing some volatility based on the poll results.  Trading GBP amid this volatility is a risky affair for currency traders since none of us have a crystal ball. Since the vote is currently too close to call, it might be sensible to lighten up your exposure ahead of the referendum.

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