Record-high interest rates, war and cooling inflation – How were currency markets shaped by the events of 2023?
Philip McHugh December 29th 2023 - 2 minute read

2023 proved to be yet another turbulent year for currency markets. Interest rates reached multi-year highs across the globe, the Ukraine war continued to churn and inflationary pressures slowly began to ease.
The record tightening enacted by many central banks saw inflation cool slowly. However geopolitical tensions, such as the war between Israel and Hamas, renewed supply pressure concerns.
Currency Pairing | 2023 High | 2023 Low |
GBP/EUR* | €1.17 | €1.11 |
GBP/USD* | $1.31 | $1.18 |
EUR/USD* | $1.12 | $1.04 |
*Please note the rates quoted are interbank. Get in touch or log in to your online account to check live rates.
What happened in 2023?
Central Banks continued their tightening cycles over the first three quarters of 2023, despite early predictions of a swift end. With the Bank of England (BoE) unexpectedly needing to continue tightening policy, this pushed the pound up against its rivals.
However, the cost-of-living crisis remained at the forefront of GBP investors’ minds, with inflationary pressures continually blighting households and businesses. Over the course of the year, these pressures did ease, falling from 2022’s peak of 11.1% down to 4.2% in November.
This was supplanted by continued fears over the state of the UK economy. Over 2023, analysts have grown increasingly concerned that the UK will enter technical recession, with GDP prints showing stalling growth.
A change in Sterling’s favour in 2023 was a fledgling sense of political stability. After 2022’s revolving door of Prime Ministers, a consistent government assuaged investors as UK PM Rishi Sunak and Chancellor Jeremy Hunt enacted a fiscally orthodox approach to balancing the books.
This was, in turn, offset by a wave of industrial action across the UK as workers fought for higher pay amid the cost-of-living crisis. Wages have since improved, and look set to do so in future, but the UK economy bore the brunt of limited activity.
Similar to the BoE, the Federal Reserve pushed interest rates to a two-decade high in 2023. Inflationary pressures receded more rapidly in the US, prompting a hold from the Fed earlier than expected.
However, the US economy has remained resilient despite the tight monetary policy, with both employment and activity remaining robust. As such, the safe-haven ‘Greenback’ began 2023 on a firm note as investors sought out a stable investment.
The European Central Bank (ECB) took a similarly hawkish approach to interest rates, continually hiking rates over the year.
However, this was offset by growing concerns over the state of the Eurozone’s economy. German factory data deteriorated notably over the year, prompting worries that the bloc’s largest economy could slip into recession.
Elsewhere, tensions in the Middle East flared towards the end of the year, following a surprise attack on Israel by Hamas. This followed with an extended retaliation from Israel, and prompted anxiety amongst markets. With many oil-producing countries in the immediate vicinity, analysts expected to see a slowdown in supply.
Towards the end of the year, however, the central banks appeared to take a breath and suspended their tightening cycles. With inflation cooling, the Fed, ECB and BoE all appeared to eye a ‘soft landing’ for their respective economies.
This prompted renewed bets on interest rate cuts early in 2024, which particularly hampered the US dollar. The Fed is expected to begin loosening its policy from March, which has stifled USD exchange rates recently.
The BoE is expected to follow suit later in the year, as inflation remains more persistent in the UK. This has allowed the pound to gain some ground against its rivals at the end of this year’s trade.
Written by
Philip McHugh