The past couple of years have been extremely challenging from a socio-economic point of view. The global economy is still reeling from the aftermath of the COVID-19 pandemic, with the heavy lock-downs and restrictions imposed during most of 2020 taking their toll on the economy. As we reach the end of 2021, it is time to take stock of current economic conditions, as well as the world economic outlook for 2022. The global economy shrank by 4.3 percent in 2020, over two and a half times more than during the financial crisis of 2009. Currently, the world economy is on the path to recovery, but with the pandemic resurging, financial recovery remains precarious and the threat of new COVID-19 variants spreads fears of a renewed economic slump. Sustained economic growth in the coming year and beyond is expected to rely on vaccination rollout, as well as on national incentives and stimulus measures.
Japanese Yen has been considered as a safe-haven currency and investors regularly turn to this asset in times of economic turbulence. Throughout most of 2020, the USDJPY exchange rate remained fairly steady, with the dollar trading between 103 and 106 Yen.
For the past year, however, JPY has been weakening against the dollar and the USD/JPY has been in an uptrend. This was partly due to a stronger dollar throughout 2021 and also to a declining Yen. Consumption and GDP data released in November showed that the Japanese economy is halting and inflation rates are very low despite the government’s efforts to pump money into the economy. Economic growth has been a considerable problem in Japan since the Covid outbreak, with supply-chain issues and material shortages affecting production in major companies. Japan’s GDP contracted an annualised 3.6 percent during the July to September period, a time in which Tokyo hosted the Olympic Games without fans and afterward experienced a spike in Covid-19 cases. The increase in new Covid-19 cases affected many industries, and consumer spending in Japan fell.
Historically, the Japanese economy has been focused on exports and a weaker Yen benefited the economy. Former Prime Minister Shinzo Abe used stimulus policies and monetary easing to weaken the currency and boost the economy, while the new Japanese Prime Minister, Fumio Kishida is expected to follow in his footsteps and is currently considering a new economic package to stimulate the country’s economy. However, rising import costs and especially increasing energy import costs have taken a toll on the country’s trade balance and economic growth. The rising cost of imported energy in Japan has also contributed towards the currency’s decline, as importers effectively need to spend more of the currency to buy oil and gas.
The USD/JPY pair rose above the 111 Yen resistance level in September and has been following a mostly upward trend since. In mid-October, the JPY fell to a three-year low as signs of economic recovery hit safe-haven assets, although the USD was not as strongly affected and the pair climbed above the 114-mark. On November 23rd, the US dollar rose above 115 yen for the first time in more than four years, as the reappointment of Jerome Powell as Federal Reserve chair fueled expectations that the U.S. central bank might tighten monetary policy faster than anticipated. The emergence of the Omicron variant in late November restored some of the Yen’s strength, as investors once more turned to safe-haven assets, but also as some investors closed their short positions on the currency. The USD/JPY dropped to approximately 112.5 in late November, but the yen failed to maintain its upward trajectory. Throughout December the JPY continued its decline, with USD/JPY rising again above 115 at the end of the year.
The Bank of Japan lowered its 2021 inflation forecast from 0.6% to 0% in November, indicating its long-term commitment to monetary expansion. In mid-December 2021, the BoJ announced plans to taper its bond-buying scheme in line with other major banks as they transition to pre-pandemic levels. In contrast to similar institutions in other countries, such as the US Fed, however, it did not announce interest rate hikes. The BoJ appears to be committed to keeping interest rates close to zero, making the Yen sensitive to rising U.S. yields. Although the BOJ’s low-interest rates aim to stimulate the country’s weak economy, they are hurting the currency, which is gradually losing its safe-haven status. Many investors who use safe haven-haven assets as hedges are shying away from the weakening currency.
Since the EU referendum of 2016, the exchange rate and volatility of the sterling has been affected primarily by Brexit news and developments. From 2016 to the end of 2020, the pound experienced heavy losses against other major currencies, such as the dollar and the Euro, because of the impending Brexit. The political uncertainty of that period, as well as increased trade friction between the UK and the EU led financial institutions to sell the pound, driving its price down. The sterling fell even lower in February 2020, to a low of US$1.15, amidst fears of the coronavirus outbreak.
The GBP benefited slightly from the Brexit deal finally being agreed with the EU at the start of 2021, trading at US$1.36 and €1.12 as fears of a hard Brexit abated. The long-awaited deal with the EU did not benefit the pound substantially, however, since trading problems were expected to affect the British economy long-term even with the deal in place. In late January 2021, rapid vaccination rollout in the UK raised optimism for the end of the hard lock-down and the re-opening of the economy, boosting the pound to over $1.37. The efficiency of the vaccination program in the UK raised hopes of a swift economic rebound, and the GBPUSD pair reached a high of 1.42 in February 2021. By March and April however, the currency couldn’t keep the momentum it had picked up from vaccination rollout and started to fall again to $1.37. In late spring and early summer, it rallied to around $1.4 benefitting from the political stability brought about from a series of victories Prime Minister Boris Johnson and his party secured in the UK’s midterm elections but started to decline again by late summer reaching $1.36 in July. In late September, the sterling sank to $1.34, its lowest point in eight months, amidst worries over supply chain issues in the UK, compounded by fuel shortages.
In the following months, the currency continued its decline as the Bank of England refrained from raising its benchmark interest rate from a historic low of 0.1%. Even though a rate hike was considered to be imminent by many economists, the BoE seemed hesitant to take this step and decided against it during its November 4th meeting. With the Fed supporting a rate hike and the ECB seeming to be strongly against one, the BoE seemed to hover between the two at the time. News of the rapid spreading of the Omicron variant in the UK and fears of renewed lock-downs and restrictions pushed the sterling further down, to below $1.32. On December 16th however, BoE Officials led by Governor Andrew Bailey voted unexpectedly in favor of a rate hike for the first time since the onset of the pandemic and the BoE became the first major bank to increase its main interest rate from its historic low of 0.1% to 0.25%. The change in policy by the BoE was prompted by a spike in inflation to a 10-year high and provided a much-needed boost for the currency. The sterling rose slightly at the end of the year, finally closing at a little over $1.35 on December 31st.
The end of 2020 saw an increase in the price of the euro. The currency had been rising steadily against the greenback since the summer of 2020, taking advance of the weakening dollar and the political instability at that time in the US. In December 2020, the European Central Bank announced a further extension of its quantitative easing package by €500 billion, taking the total stimulus package to €1.85 trillion. At the beginning of 2021, the euro was at its highest point against the dollar since 2018, rising above $1.22, and was also strong against the pound and other major currencies. The rise of the euro was seen mainly as a problem by the ECB since the high value of the currency impeded imports and made exports less competitive during a time when the EU economy was especially fragile in the midst of the pandemic. ECB President Christine Lagarde stated that the bank was paying close attention to the euro exchange rate, but did not seem to be ready to take aggressive measures to bring the currency’s price down.
By the end of February however, the euro started to decline, going to a four-month low against the dollar at approximately $1.17 by the end of March, as economic reopening seemed to stall in the EU. Problems in vaccination delivery and distribution, as well as extended lockdowns in many EU countries, led to concerns about the management of the coronavirus in the eurozone. Inflation started to increase in the EU driven by disruptions in the supply chain that increased commodity prices, as well as by high energy prices. The declining trend of the EURUSD pair was temporarily reversed in April, on the back of faster vaccinations and falling Covid-19 hospitalizations. The euro climbed above $1.22 at the end of May, almost as high as its January peak, although it could not break through that resistance level.
The euro started to decline again at the end of September, breaking through its March support of $1.17. The downtrend continued until the end of November, amidst fears of tightening Covid regulations in Eurozone countries and the euro crumbled below $1.12. The main factor that led to the weakening currency was the ECBs monetary policy. The ECB maintained a dovish stance and did not seem to be in a hurry to increase interest rates, with President Christine Lagarde commenting that “we must not rush into a premature tightening”. Economic indicators in the EU showed that inflation was surging, hitting a 13-year high of 4.2% per year in October. Despite the growing inflation rates, the ECB did not seem prepared to consider a rate hike or reduce bond buying. The emergence of the Omicron variant also contributed to the currency’s decline, with resentment rising in European capitals over fears of renewed COVID restrictions.
The EU was also troubled by migrant problems at the Belarus-Poland border and growing tensions between Russia and Ukraine, with Russian troops amassing on the border of Ukraine.
In its long-awaited meeting on December 16th, the ECB decided that it would further cut its bond purchases and announced the end of its pandemic emergency asset-buying scheme next March. ECB president Christine Lagarde stated in a news conference that the pandemic was again depressing spending in the eurozone and threatening growth, and seemed determined to continue the bank’s monetary policy support for the eurozone economy into 2022. She emphasized the need for gradually cutting back stimulus in order to promote economic recovery, although several policymakers warned that the bank is underestimating inflation risks. Even though the ECB’s message was essentially dovish, it was largely seen to mark a transitionary period from the pandemic era support to a future interest rate hike in a couple of years and the euro rose slightly above $1.13. Throughout December, the EUR/USD pair moved sideways, closing at almost $1.14 on December 31st.
The dollar is considered a safe-haven asset and investors turn towards the currency in times of economic turbulence, increasing its price. In mid-2020, successful vaccination trials boosted the global economic outlook encouraging investors to turn towards more risky assets and away from the dollar, which started to decline. The announcement of successful coronavirus vaccine trials in November 2020 increased expectations that the Federal Reserve would maintain its loose monetary policy, driving the USD further down. The greenback had lost almost 7% of its value by the end of 2020, as demand for risky assets, such as emerging-market currencies, revived. Political uncertainty in the US in the aftermath of Biden’s turbulent US Presidential election also contributed towards the greenback’s decline. At the end of the past year, the dollar index, which measures the greenback against a basket of other major currencies, was approximately 89.5 and the EURUSD exchange rate was above 1.22, indicating a weakening dollar.
After declining through much of 2020 however, the start of 2021 saw the dollar gaining strength as it became clear that the end of the pandemic and global economic recovery would not be as swift as previously hoped for. The global coronavirus pandemic worsened, Europe struggled with vaccination rollouts, and lockdowns were renewed in many countries at the beginning of the year. Fed officials contributed towards the greenback’s advance by voicing concerns about the bank’s ultra-loose monetary policy, thus showing signs of future tapering of the central bank's asset purchases. Democratic wins in the Georgia Senate runoff races bolstered Biden’s economic plan and provided the US president with political support to pass a $1.9 trillion COVID-19 relief bill, which aimed to bolster the country’s economy. At the same time, the ECB’s path diverged completely from that of the Federal Reserve’s, moving towards more easing, while the Fed strove towards policy normalization.
The EUR/USD exchange rate fell to 1.17 by the end of March, as the dollar index rose above 93. In April and May, however, vaccination rollouts and signs of global economic recovery pushed the dollar down again, with the EUR/USD pair rising above 1.22. Demand for safe-haven assets fell temporarily during the Spring of 2021 and demand for riskier assets grew once again. In June, Federal Reserve officials expressed their expectations for the first post-pandemic rate rise by 2023. Rising inflation rates in the US during the summer and fall of 2021 fueled speculation that the Federal Reserve would raise interest rates even sooner than expected. The hawkish shift in the Fed’s policy benefited the dollar and the outlook for the currency became bullish. The dollar index rose to almost 93 in July and the EUR/USD exchange rate fell to 1.17 again, as the price of the dollar increased.
Within most of 2021, the USD exchange depended mostly on the Fed’s monetary policy. With rising inflation rates in the US, indicators of inflation influenced USD price providing insight into the Fed’s future policy. Over the past few months, several high-ranking members of the Federal Reserve have voiced the opinion that the US central bank needs to slow bond purchasing in order to reduce inflation. The Fed’s expected tighter monetary policy and imminent rate tapering have been driving the dollar up over the past few months. After breaking through the 1.17 support level by the end of September, the EUR/USD rate continued its downward trend throughout the fall. Biden announced his nomination of Jerome Powell for the Federal Reserve chair at the end of November. The continuation of Jerome Powell’s incumbency was considered positive for the USD as the Fed chair has shown a hawkish stance in the past year. The dollar index reached an annual high of almost 97 at the end of November, while the EUR/USD rate fell below 1.12. Throughout December, the dollar index remained relatively stable at a little over 96, and the EUR/USD pair moved sideways, trading between 1.12 and 1.13. At the end of the year, the USD was still going strong as the rapid spread of the Omicron variant was fueling fears of renewed lockdowns. EUR/USD closed at almost $1.14 at the end of the year, while the dollar index closed at 95.6.
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