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2021, another turbulent year in currency markets

currency-news2021, another turbulent year in currency markets
Economies continued to get back on track through 2021, while the main driving forces of currency market movement had a feeling of déjà vu.

Countries emerging from lockdowns, vaccine rollouts, and central bank monetary policy stimulus dominated through 2021.

At the same time, global economic recovery brought supply chain bottlenecks, surging inflation, and job market challenges that added volatility.
 
2021’s key exchange rates

Highs

GBP/EUR - €1.19
GBP/USD - $1.42
EUR/GBP - £0.90
EUR/USD - $1.23

Lows

GBP/EUR - €1.10
GBP/USD - $1.34
EUR/GBP - £0.83
EUR/USD - $1.12

*Please note the rates quoted are interbank. Get in touch or log in to your online account to check live rates.
 
What happened in 2021?

The pound was the best performer through the first part of 2021 as the UK’s impressive vaccination rollout outpaced other countries, and Brexit trade deal relief provided optimism in the country’s economic outlook.

However, delays in the UK government’s plans to emerge from lockdown, the spread of the Delta variant and rising tensions in post-Brexit UK-EU talks ended Sterling’s momentum in the summer.

Going into the fourth quarter, fears of stagflation in the UK economy crept in, with surging inflationary pressure and slowing economic growth, while signs from some Bank of England (BoE) policymakers suggested they would raise interest rates.

The BoE went from dismissing negative interest rates at the start of the year to wrong footing investors twice at the end of the year. Firstly, the central bank failed to raise rates when widely expected then shocked markets with a rate hike to 0.25% from 0.1% in December amid rising Omicron variant concerns.

Meanwhile, the US dollar was on the back foot through the first half of the year before outperforming the pound and euro in the third and fourth quarters of 2021.

Risk-on market trade earlier in the year weighed on safe-haven demand for USD, as the Biden administration announced massive stimulus packages, and the Federal Reserve maintained a loose monetary policy stance to aid the US economic recovery.

However, the US dollar strengthened through the second half of the year to hit highs in the fourth quarter as surging Covid-19 cases dampened global growth prospects, inflation jitters spooked markets, and the Federal Reserve accelerated the tapering of its bond-buying programme.

The euro moved in the opposite direction to the US dollar due to the strong negative correlation in the pairing, starting the year at its highest levels before steadily declining to lows in the fourth quarter.

The Eurozone’s sluggish vaccination rollout and restrictions in many European countries weighed on EUR sentiment.

Meanwhile, the European Central Bank’s (ECB) increasingly divergent policy stance to other major central banks also drove the euro lower by policymakers reiterating rates will remain low, inflation will be transitory, and maintain accommodative policy for some time.

Reintroduced Covid restrictions in many countries in Europe pressured the single currency again in the fourth quarter as a fourth wave of coronavirus swept the continent.
 
2022 and exchange rates

We go into 2022 with Covid-19 cases hitting record pandemic highs in many countries, and a lack of conclusive evidence as to whether Omicron is less severe than other coronavirus variants.

The prospect of stricter Covid measures around the world may weaken the global economic growth outlook and sour market mood.

Tightening monetary policy from the Fed, ECB and BoE looks set to remain a major driver of currency market movement through 2022.

After the BoE became the first to hike rates, how aggressively they continue to raise rates will likely drive significant GBP movement, while some investors expect the Federal Reserve to begin hiking rates in March when it winds up tapering its bond-buying programme.

The euro may come under pressure as signals point to the ECB keeping rates unchanged at 0% and significant bond purchases in place throughout 2022 after emergency pandemic stimulus ends in March.

However, all the major central bank policy decisions will be influenced by soaring inflation, which has frequently exceeded forecasts and is not expected to decline meaningfully until the second half of 2022 at the earliest.

Concerns over a slowdown in growth in China’s economy, legislation for US stimulus of $1.75 trillion hanging in doubt, and potential crisis in emerging market currencies such as the Turkish Lira may also send risk-off trade ripples through currency markets.
Philip McHugh

Philip McHugh

Joining the corporate trading desk in 2007, Phil now over sees all of Currencies Direct’s corporate dealing activity. Having gained experience working with hundreds of businesses to optimise international payments processes and execute comprehensive risk management strategies, Phil currently works with a portfolio of corporate clients whilst managing Currencies Direct’s overall market exposure

Phil has FCA approval and has completed the Certificate in International Treasury Management (CertiTM)

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