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2023 Forex and Commodities Outlook

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Written by:
Myrsini Giannouli

05 January 2023
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Forex 

USD

Reduced price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate raises, increasing the likelihood that the Fed will ease its rate hikes in 2023.

The dollar had a strong run in 2022, propelled upwards by global economic concerns and monetary policy tightening. The dollar index, which measures the USD strength against a basket of other currencies, was catapulted to 20-year highs. The dollar started the year low, with the dollar index hovering around the 95 level. The USD maintained a steady upwards trajectory until the fall of 2022 and the dollar index went above the 114 level for the first time since 2002. In November however, the dollar started to succumb to downward pressures, ending the year near 103.5.

US Treasury yields were also boosted in 2022, providing support for the dollar. The US 10-year bond yielded almost 4.2% in October for the first time since 2008 but declined slightly after November, ending the year near 3.9%. 

Increased global recession concerns boosted the safe-haven dollar in 2022. US GDP data revealed that GDP rose by 3.2% for the third quarter of 2022. The US economy is still expanding, but recession fears loom for 2023.

A tight monetary policy in 2022 propelled the US dollar and treasury yields upwards. Soaring inflation plagued the US, with headline inflation peaking at 40-year highs of 9.1% in June. Increased price pressures have forced the US Federal Reserve to pivot to a hawkish monetary policy to combat high inflation rates. 

The Fed had to resort to a series of rate hikes to bring inflation down. At the latest monetary policy meeting in December, FOMC members voted to raise interest rates by 50 basis points, bringing the Fed’s benchmark interest rate to a target range of 4.25% to 4.50%. The US central bank had raised interest rates by 75 bps in previous meetings, however, and the drop to a 50-bp hike was seen as the beginning of a pivot toward a more dovish monetary policy.

The interest of market participants is now mostly focused on what lies ahead for the Fed. US inflation seems to be cooling, as US headline inflation dropped to 7.1% year-on-year in November. Reduced price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases in the following year. US economic outlook and inflation will likely determine the pace of rate hikes in 2023. Many analysts believe that the Fed will ease its rate hikes in 2023, but will continue raising interest rates at a slower pace until the benchmark interest rate reaches at least 5.0%. This means that there are still a couple of rate hikes up ahead, which may provide support for the dollar into the new year.

Global recession concerns remain high, boosting the dollar. The USD however, has been trading in overbought territory for some time and has started to deflate since November. The dollar index remained steady at the start of the new year but will need further support to regain its strength. 

TRADE USD PAIRS

EUR 

Eurozone economic outlook is poor and the ECB might be forced to raise interest rates in a recessionary backdrop.

The EU faced heavy challenges in 2022, which brought pressure on the Euro. The Euro dipped in the first three quarters of last year, plunging to 20-year lows. The EUR/USD dropped below the parity level in August, struggling to get past this level until November. Only in the past couple of months has the Euro started to rally, benefitting from the dollar’s weakness and the EUR/USD pair ended the year near 1.050. If the currency pair goes up, it may encounter resistance at 1.061 and higher up near 1.078. If the EUR/USD pair declines, it may find support at 1.035 and further down at the parity level. 

The Euro was under a great deal of pressure in 2022. The war in Ukraine threatened to spill over in Europe and disrupt the stability of the Eurozone’s borders. The heavy dependency of many EU member states on Russian food and energy caused Eurozone inflation to skyrocket. Increased price pressures combined with a weak economic outlook brought stagflation in the Eurozone, a toxic mix of high inflation and stale economic growth.

Eurozone inflation reached an all-time high of 10.6% in October. The ECB was slow to react to surging inflation, adopting a cautious attitude for the first half of 2022 in contrast to the Fed, which shifted to an aggressively hawkish monetary policy early on. The ECB finally started raising interest rates in July, in a belated attempt to tackle inflation.

In its latest monetary policy meeting in December, the ECB raised interest rates by 50 bp, bringing its benchmark interest rate to 2.50%. Eurozone inflation reached 10.1% year-on-year in November from an earlier flash estimate of 10.0%. Although this is the first time in 2022 that inflation dropped instead of going up, it is still far from the ECB’s 2% goal and interest rates need to rise significantly to combat entrenched Eurozone inflation. 

Soaring EU inflation rates are forcing the ECB to hike rates aggressively to reduce price pressures. Cooling price pressures in the US on the other hand, have trimmed Fed rate hike expectations for 2023. The ECB’s hawkish shift compared to the Fed’s more dovish forward guidance is turning the tide in favor of the Euro. 

The question however is, whether economic conditions in the Eurozone will allow the ECB to continue raising interest rates at a fast pace. The ECB has updated its economic growth forecast by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024, and 1.8% in 2025. These are lower than previous estimates, indicating that Eurozone economic outlook is poor and that the ECB might be forced to raise interest rates in a recessionary backdrop.

EURUSD 1hr chart

TRADE EUR PAIRS

GBP 

The BOE gave uncertain forward guidance leaving the door open for further rate hikes, but signaling that interest rate increases might pause within the first quarter of 2023.

The Sterling had a volatile year, driven by high inflation and deteriorating economic health in the UK. The Sterling retreated against the dollar in 2022, with GBP/USD plunging to 1.040 in September. The dollar’s weakness propelled GBP/USD upwards towards the end of 2022 though, breaking the downwards trend and GBP/USD ended the year near 1.200. If the GBP/USD rate goes up, it may encounter resistance at 1.244, while support may be found near 1.176. 

A climate of political uncertainty put pressure on the GBP throughout 2022. The infamous Partygate scandal was the catalyst that brought Boris Johnson’s premiership to an end. Boris Johnson was forced to resign in July and a tumultuous political time followed, with Britain’s ruling party trying to replace Jonson in a prolonged race for the party’s leadership. 

The month of September marked historic changes for Britain, seeing a new monarch and Prime Minister within a few days. The Sterling dropped after Queen Elizabeth’s death and continued to decline after Liz Truss became UK’s Prime Minister in September. Political instability has been playing a major part in the currency’s decline, driving the pound to an all-time low. Truss’ administration introduced a highly controversial budget with major tax cuts, which would primarily benefit the highest earners in a time of heightened economic pressure on British households.

Truss resigned near the end of October and was replaced by Rishi Sunak, who was left with the unenviable task of bringing a semblance of order to the UK’s finances. The British economy is shrinking and the country is already in the grip of recession. The BOE recently revised its economic growth projections, with GDP expected to drop by 0.1% in Q4 2022. The British economy is still struggling and policymakers will have to assess how much tightening it can withstand to bring inflation down. 

At the same time, surging inflation has forced the BOE to adopt a more hawkish fiscal policy. Annual CPI hit a 41-year high of 11.1% in October, further crippling the British economy. The BOE has been conducting successive rate hikes since the end of 2021, bringing its interest rate to 3.50% at the end of 2022, its highest rate in 14 years. 

After a year of fiscal tightening, UK headline inflation finally dropped to 10.7% in November, alleviating some of the pressure on the BOE to raise interest rates. In the latest monetary policy meeting in December, BOE members voted to hike rates by 50 bps. With inflation remaining above 10%, this was perceived by many analysts as the start of a pivot toward a more dovish fiscal policy, putting pressure on the Sterling. 

The BOE gave uncertain forward guidance, leaving the door open for further rate hikes, but signaling that interest rate increases might pause within the first quarter of 2023. The latest BOE vote was not unanimous, with 6 MPC members voting for the 50-bp rate hike, two others to maintain interest at its current rate, and another member in favor of a 75-bp increase. The UK’s grim economic outlook may limit policymakers’ ability to increase interest rates sufficiently in 2023 to rein in inflation.

GBPUSD 1hr chart

TRADE GBP PAIRS

JPY

BOJ Governor Haruhiko Kuroda is due to retire in April and his successor may decide to unwind the BOJ’s ultra-easy policy within 2023. 

The Yen experienced a volatile year in 2020. The Yen had a weak run for the first three quarters of the year. The USD/JPY threatened to cross the 145 level in September. This level seems to represent a line in the sand, as the Japanese government rushed to intervene when the currency pair crossed this level back in 1998. The Japanese Ministry of Finance intervened in September in the Foreign Exchange market for the first time since 1998. The Yen jumped abruptly against the dollar in what was undoubtedly large-scale selling of dollars and buying Yen.

USD/JPY was catapulted above the 150 level in October, touching the 152 level for the first time since 1990. This prompted a fresh intervention from Japanese authorities, boosting the Yen abruptly. The Yen started to recover since, and the USD/JPY followed a downward trajectory for the remainder of 2022, ending the year near 131. If the USD/JPY pair declines, it may find support at 130.4. If the pair climbs, it may find resistance at the psychological level of 142.2.

The final GDP Price Index for the third quarter of 2022 showed economic contraction by 0.3% on an annual basis and the final quarterly GDP for Q3 of 2022 printed at -0.2%. The Japanese economy shrank in the third quarter of 2022, mainly due to the high costs of imported energy. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy. 

Price pressures continue to rise in Japan, as BOJ CPI for October rose to 2.7% on an annual basis, mainly due to the high cost of imported energy. Inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households.

The BOJ caused a stir in markets in December by finally yielding to increased price pressures and tilting its monetary policy. In the latest monetary policy meeting, Japanese policymakers maintained the central bank’s refinancing rate at -0.10%. The BOJ however, changed its yield control target for its 10-year government bond to between plus or minus 0.50%, from a previous 0.25%. The BOJ had set a target range around zero for government bond yields for years and this adjustment may be the prelude to a shift towards a more hawkish policy. Long-term, this move may allow interest rates to rise, cutting off some of its monetary stimuli. 

BOJ Governor Haruhiko Kuroda seems to be finally ready to relax his aggressively dovish policy, stating recently that the BOJ aims to bring inflation back down to the bank’s 2% target. Kuroda is known for his persistently dovish stance and even a slight change in the BOJ’s forward guidance can drive the Yen upwards. In addition, Kuroda is due to retire in April and his successor may decide to unwind the BOJ’s ultra-easy policy. A pivot in Japan’s monetary policy within 2023, would boost the Yen considerably. 

USDJPY 1hr chart

TRADE JPY PAIRS

Gold 

A diminishing economic outlook may force central banks around the world to pivot to a more dovish fiscal policy in 2023, boosting gold prices.

Gold prices were volatile in 2022, driven mainly by the dollar’s strength and influenced heavily by geopolitical events. Gold touched an annual high of $2,070 per ounce in March, as the crisis between Russia and Ukraine escalated. The safe-haven gold became a much sought-after investment in the first turbulent months of the war in Ukraine. 

The dollar, however, gained considerable strength in 2022, putting pressure on competing assets, such as gold. The dollar was catapulted to 20-year highs in November and gold dropped to $1,615 per ounce, as the dollar soared. The dollar’s decline towards the end of 2022 boosted gold prices again, which ended the year near $1,820 per ounce. If gold prices continue to increase, resistance may be encountered near $1,877 per ounce, while if gold prices decline, support may be found near $1,723 per ounce.

US Treasury yields were also boosted in 2022, putting pressure on gold prices. Gold prices have been affected largely by US treasury yields in the past year, as these reflect Fed rate hike expectations. The US 10-year bond yielded almost 4.2% in October for the first time since 2008 but declined slightly after November, ending the year near 3.9%.

Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise. Several major Central Banks, such as the Fed, the ECB, and the BOE raised interest rates considerably in the past year. A worldwide wave of fiscal tightening drove gold prices down.

Increased global recession concerns, however, raise the appeal of gold as an investment. In China, prolonged Covid lockdowns have dealt a significant blow to the economy. Many countries are facing poor economic outlooks, coupled with high inflation rates, raising recession fears. A diminishing economic outlook may force central banks around the world to pivot to a more dovish fiscal policy in 2023. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations for 2023, providing support for gold prices.

As the Fed and other central banks started to scale back their aggressive rate hiking, gold prices surged. Gold has been in a bullish trend for the last couple of months, which is likely to continue if the Fed signals a pause in raising interest rates within the first quarter of 2023.

XAUUSD 1hr chart

TRADE GOLD

Oil 

China’s economy has suffered from prolonged lockdowns, raising concerns over the demand outlook for oil into 2023 and putting pressure on oil prices. 

Oil prices were volatile in 2022, fluctuating heavily in a tug-of-war between supply and demand. WTI's price touched $130 per barrel in March for the first time since 2008. Oil prices remained high until mid-June but then started to follow a downward trajectory, dropping below the key level of $100 per barrel in August. Oil prices were under pressure from global recession concerns towards the end of the year, with WTI price retreating as low as $77 per barrel in December and ending the year near $77 per barrel. If the WTI price declines, it may encounter support near $70.2 per barrel, while resistance may be found near $82.9 per barrel.

Geopolitical pressures caused oil prices to skyrocket at the start of the year. The war in Ukraine raised supply concerns driving oil prices upwards. Western allies imposed heavy sanctions against Russia, with the US banning all oil and gas imports from Russia. The EU was highly dependent on Russian energy exports and delayed as much as possible to impose direct sanctions on Russian oil. G7 leaders finally agreed to set a cap of $60 per barrel on Russian oil exports in December. The oil cap might limit supply in 2023, boosting oil prices, especially since Russian President Vladimir Putin has threatened to cut down production and refuse to sell oil to any country imposing a Russian oil price cap. 

Oil prices are being driven by opposing market forces. On one hand, supply concerns primarily from the war in Ukraine are keeping oil prices up. On the other hand, reduced demand has put pressure on oil prices, especially after the second quarter of 2022.

The uncertainty over oil demand in China has influenced oil prices considerably over the past year, as China is the world’s largest energy importer. China has followed a zero-Covid policy with prolonged lockdowns and heavy restrictions, which have dampened oil demand. The Chinese government recently eased some of its strident Covid regulations, abandoning its zero-Covid policy. China’s relaxation of Covid zero policies has boosted oil prices. China’s economy, however, has suffered from prolonged lockdowns and the country’s debt has ballooned over the past few years. China’s weak economy is raising concerns over the demand outlook for oil into 2023, pushing prices down. 

The global economic slowdown and recession concerns are decreasing the oil demand outlook, putting pressure on oil prices. Aggressive rate hikes stifle economic activity fuelling recession fears. Several major Central Banks, such as the US Federal Reserve, the ECB, and the BOE raised interest rates significantly over the past year, raising concerns that poor economic outlook and looming recession will reduce oil demand. 

Over the past year, OPEC+ has repeatedly missed its production target, with several of its members failing to meet its quota. Supply woes boosted oil prices considerably in the first half of 2022. However, the drop in oil prices below the $100 per barrel key level drove OPEC+ members to cut down production by 100,000 barrels per day in September and by a whopping 2 million barrels per day in October. The organization has decided to curtail oil production to keep oil prices high, despite mounting global recession risks.  OPEC+ will continue oil production cuts into 2023 to boost oil prices, curtailing oil supplies by 2 million barrels per day.

WTI 1hr chart

TRADE WTI

Bitcoin and major cryptocurrencies

The global cryptocurrency market capitalization was above $2.3 trillion at the beginning of 2022 and dropped to $830 billion by the end of the year.

Crypto markets and stock markets suffered heavy losses in 2023. Increased geopolitical pressures soured risk sentiment, driving riskier assets down. 

Bitcoin price plummeted, dropping from its annual high of $48,000 in March to below $16,000 in November, ending the year slightly higher, near the $16,700 level. If the BTC price declines, support can be found near $15,600, while resistance may be encountered at $18,400. 

Ethereum price reached its yearly peak of $3,570 in April, but declined rapidly in the following months, touching $1,077 in November and ending the year near $1,200. If Ethereum's price declines, it may encounter support at $1,077, while if it increases, resistance may be encountered near $1,350.

The crypto industry has been under pressure since the beginning of 2022 with huge losses in trading volumes. The global cryptocurrency market capitalization was above $2.3 trillion at the beginning of the year and dropped to $830 billion by the end of 2022. 

A strong risk-off sentiment prevailed throughout the year, triggered by geopolitical tensions, driving investors to safer assets and dampening the appeal of cryptocurrencies. Stock markets also suffered heavy losses in 2022, putting pressure on cryptocurrencies, as crypto markets have been following the overall trends of stock markets, especially of tech stocks. 

Cryptocurrency prices plummeted, pushed down by increased risk-aversion sentiment and a shift of major central banks towards a more hawkish fiscal policy. Most major Central Banks, such as the US Federal Reserve, the ECB, and the BOE raised interest rates considerably over the past year, fuelling global recession concerns and driving risk sentiment down. 

Increased risk aversion sentiment recently hit crypto markets hard after the collapse of FTX. The FTX token faced liquidity issues, triggering a generalized crypto market sell-off and undermining confidence in the crypto industry. The FTX collapse is likely to cause ripples in the crypto industry for some time, as FTX CEO Sam Bankman-Fried has been arrested and is facing criminal charges. 

Risk sentiment, however, is boosted by China’s economic reopening. The Chinese government has eased some of its strident Covid regulations, abandoning its zero-Covid policy. The Chinese economy has suffered from prolonged lockdowns but reports that the government plans to support the economy, raising hopes of economic recovery.

Bitcoin and other major cryptocurrencies are starting 2023 from a 2-year low. Many market participants, however, believe that the cryptocurrency selloff is nearly over and that the current low prices offer an investment opportunity. A bullish trend might emerge within the year, especially if major central banks pivot towards a more dovish monetary policy.

BTC/USD 1h Chart

BTCUSD 1hr chart

 

ETH/USD 1h Chart

ETHUSD 1hr chart

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Written by:
Myrsini Giannouli

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