2022 was a fascinating year for the forex market as a collection of unique market drivers stimulated robust action for many currencies around the world. The Russia/Ukraine War and post-COVID-19 monetary policy were two of the largest underpinnings. Also, global recession and disjointed commodities prices impacted many FX pairs.
Read on to learn more about five of the most volatile currencies of 2022. While exotic and developing economy monies frequently exhibit erratic price action, this article will focus largely on the majors. Upon completing this list, you'll have a good idea of where the action was in 2022 and where it may be in 2023 and beyond.
5. United States Dollar (USD)
As the world's reserve currency, the United States dollar (USD) isn't typically thought of for its volatility. However, 2022 brought a seismic shift in United States Federal Reserve (Fed) policy from accommodative to restrictive. The result was a repricing of the Greenback and significant price action across the majors.
By far, central banking policies are the primary driver of currency values. In the U.S., the Fed pivoted from the unlimited quantitative easing practices of the COVID-19 pandemic era to more hawkish policy. Essentially, the Fed began the process of tightening the money supply via the implementation of two devices:
- Interest Rate Hikes: Beginning in March 2022, the Fed began instituting consistent rate hikes. In March, the US Federal Funds Rate was raised by a modest 25 bps, the first such rate hike in more than four years (2018). This was the initial salvo in a series of similar moves, which saw interest rates move from 0.0% to 2.25% in the first seven months of the year.
- Unwinding The Balance Sheet: At the same time, the Fed began to shrink its balance sheet by reducing its holdings of US Treasuries and privately-held mortgage-backed securities.
Each policy's intention was to combat a steep rise in inflation. For June 2022, the US Consumer Price Index (CPI) came in at 9.1%, levels not seen since the late 1970s. As a result, the USD became exceedingly volatile as forex traders attempted to price in the Fed's policy shift.
Throughout 2022, the USD showed significant strength versus the majors. In fact, the US dollar Index (DXY) rose more than 14.5% over the first eight months of the year. Large one-month moves included a 4.87% rise in April and 2.80% rally in June. Upon the onset of trade in August, the DXY stood at levels not seen since 2002.
4. Euro (EUR)
One of the largest financial market drivers of 2022 was a steep uptick in global inflation. The eurozone was not spared from the pricing instability, as EU inflation reached 8.9% in July 2022. Concerns regarding the future of economic growth and recession prompted aggressive mid-summer action by the European Central Bank (ECB).
At their late-July meeting, the ECB Governing Council raised three key interest rates by 50 bps (basis points) to address rising inflation. The rate hikes were instituted to restore consumer prices and drive inflation back toward the ECB's intermediate-term 2% target.
The ECB's rate hike was the first such move in 11 years, dating back to the Global Financial Crisis of 2008-12. However, it wasn't the only policy shift instituted to support the eurozone economy. The ECB also chose to sustain the COVID-19 era Asset Purchase Programme (APP) and Pandemic Emergence Purchase Programme (PEPP). The ECB chose to take a data-dependent stance toward policy changes following the late-July interest rate hikes as well.
Among the end products of the ECB's 2022 policies was volatility in the EUR. Below are several performance metrics for the euro (EUR) against several of the FX majors from 1 January 2022 to 1 August 2022:
- The EUR/USD experienced a rapid depreciation of value, falling more than 10% for this period. In the process, the EUR/USD returned to sub-parity levels not seen in nearly two decades.
- Bullish price action dominated trade of the EUR/JPY throughout the first half of 2022. For the period, the EUR/JPY rose 4%. The largest monthly move came in March, with the EUR/JPY posting a massive range and a 4.39% gain.
- In the midst of rising crude oil prices, the EUR/CAD posted a significant downtrend for Q1 and Q2. For the first seven months of the year, the EUR/CAD fell upwards of 9% on strong energy pricing. During this period, the EUR/CAD only had one positive month, a modest gain of 0.13%.
Altogether, the EUR exhibited consistent volatility across the majors. The underpinnings for this action are diverse but include ECB policy and higher energy prices.
3. British Pound Sterling (GBP)
The British pound sterling (GBP) experienced plenty of volatility in 2022. Like the USD and EUR, inflation plagued the U.K. throughout the first half of the trading year. As a result, the Bank of England (BoE) faced the challenges in a similar way to the ECB and Fed—by tightening monetary policy.
Perhaps the largest BoE policy shift was executed in August, with a ½ point rate hike from 1.25% to 1.75%. This was the largest such interest rate move in 27 years. In the aftermath of instituting the new policy, the BoE issued a dire statement:
"The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative."
The BoE's predictions came on the heels of 40-year high inflation, resignation of UK Prime Minister Boris Johnson and contracting GDP. Cries of " stagflation " undermined the GBP and brought heavy volatility to several GBP pairs from 3 January to 1 August 2022:
- The pound sterling wasn't able to establish any solid footing against the USD. For the period, the GBP/USD fell from 1.3523 to 1.2170, a loss of more than 10%. From January to August, the cable only posted one winning month, a slight gain of 0.25%. Conversely, the largest losing month came in April, a plunge of 4.31%.
- Whipsaw action defined trade of the GBP/JPY, marked by frequent gains and retracements. Nonetheless, the GBP/JPY rose more than 4% for the period. The largest monthly range came in March, where trade commenced between 164.65 and 150.97, a massive 1368 pip span.
The combination of runaway inflation and economic contraction brought significant action to the GBP. Additionally, the dramatic predictions from the BoE itself didn't promote stability in the pound sterling. Subsequently, a period of dramatic volatility was the result from Q1 to Q3 2022.
2. Japanese Yen (JPY)
One thing that the USD, GBP, and EUR had in common in 2022 was inflation. To combat this pricing instability, each currency's central banking authority attempted to decrease the domestic money supply. This was done by reducing their balance sheets and raising interest rates.
However, the Bank of Japan (BoJ) took an opposing approach to managing the financial challenges of the post-COVID era. Instead of hiking interest rates and decreasing their debt load, the BoJ chose to hold interest rates historically low and continue its unlimited bond buying program. The lack of any quantitative tightening sent the Japanese yen (JPY) to a 24-year low against the USD, with the USD/JPY hitting 135.6 in June.
Perhaps the largest challenge facing the yen was Japan's sovereign debt load. A primary consequence of the BoJ's unlimited bond buying and bond yield cap was the accumulation of debt. As of August 2022, Japan's government debt measured 10 million yen per person, a total of US$9.43 trillion. This outstanding debt placed bearish pressure on the JPY and posed an array of questions regarding Japan's economic strength.
The dovish BoJ policy and debt load contributed to an exceedingly volatile period for the JPY from 3 January to 1 August 2022:
- The USD/JPY posted a seven month bullish trend, rallying from 115.09 to 133.23, a gain of 15.7%.
- In addition to steep losses versus the GBP and EUR, the JPY struggled to hold its value against the Australian dollar (AUD). For the same period, the AUD/JPY ran from 83.67 to 93.08, a gain of 11.2%.
1. Russian Ruble (RUB)
Although traditionally an exotic currency, the Russian ruble (RUB) saw historic volatility in 2022. The primary catalyst driving the RUB was Russia's invasion of the Ukraine. Subsequent sanctions, a gold peg and bullish commodity prices contributed to robust volatility in the RUB.
Here is a closer look at the key underpinnings that drove volatility to the RUB:
- Rate Hikes: In the immediate aftermath of Russia's late-February invasion of the Ukraine, Western powers enacted severe economic sanctions on Russia. To combat the fallout on the RUB, the Central Bank of Russia hiked interest rates to 20%. This helped to drive the USD/RUB down 22.70% for the week of 14 March.
- Commodity Prices: Russia's stance as a major crude oil and natural gas exporter was a bullish market driver for the RUB. Also, the Russian government instituted a policy of only selling natural gas exports in rubles. This prompted an epic recovery in the RUB/USD, falling from 139 to 84 in March. For the month, the RUB was the top performing global currency.
In addition, Russia pegged the RUB to gold at one ounce for 5,000 ruble. The move helped to strengthen the RUB in May, gaining 12.18% versus the USD. Without question, the Russian ruble was the most volatile currency of 2022.
2022 was a historic year for many currencies. Massive inflation, the response of central banks and the Russia/Ukraine War drove many global currencies to historic highs and lows.
Five of the most volatile monies in 2022 were the United States dollar (USD), euro (EUR), British pound sterling (GBP), Japanese yen (JPY) and Russian ruble (RUB). Consistent price action and trending markets defined market behaviour. For many active investors and traders, the pricing fluctuations created a collection of unique opportunities and also a dynamic risk environment.
FXCM Research Team
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