While reflecting on the markets in 2022, I asked myself what I would title this year’s market review and I have to admit, it was a struggle. Fortunately, Shakespeare’s Henry V managed to sum the year up nicely for me.
Once more unto the breach, dear friends, once more.
2021 left us against a backdrop of threats of further COVID-19 lockdowns, as the new Omicron strain took root, Brexit was still rumbling on and the Bank of England (BoE) finally raised interest rates from 0.1% to 0.25%, as inflation began to etch itself back into the global economy with most central banks dismissing the spike as ‘transitory’. 2022 would probably make them regret the phrase. In markets, sterling enjoyed a rally against its peers finishing the year at over 1.34 against the US dollar and was trading in the mid 0.84s against the euro. The FTSE 100 Index opened 2022 at 7,500 with the Dow Jones Index trading at 36,500 (sadly the peak of the year).
Quite frankly, the beginning of 2022 was unremarkable in comparison to 2020 and 2021, but hindsight tells us that it was a case of being lulled into a false sense of security.
January – A relatively slow start to the year as COVID-19 restrictions begin to ease, although tensions are beginning to build between Russia and Ukraine, as Russian troops begin to amass on the Ukrainian border. In the UK, pressure begins to increase on prime minister Boris Johnson as an excerpt of Sue Gray’s investigation into parties in Westminster during lockdown is published. It wouldn’t be the last time that these two subjects came up during the year. On the markets, GBP/USD traded at 1.34 and EUR/GBP at 0.83.
In other news, tennis world champion Novak Djokovic is deported from Australia ahead of the Australian Open due to not meeting the COVID-19 vaccine requirements.
March – March is the month when things started to get serious and markets begin to react, all as a result of the conflict in Ukraine. Firstly, the Russian assault on Kyiv is swiftly and defiantly dashed by the Ukrainian troops standing firm and repelling the aggressors. It finally dawns on markets that this is not going to be a swift conflict. Oil prices rockets during the month, peaking at US$120 per barrel. The effect on the exchange markets is also felt as the US dollar begins to make a move, EUR being the biggest loser as EUR/USD moves 5% lower, GBP/USD shifted back to 1.30, a loss of 3% against the US dollar. The UK and the US raise interest rates by 25 basis points to 0.75% and 0.5% respectively.
In other news, at the Oscars ceremony the ‘slap’ of the year could be heard across the world as actor Will Smith slaps Chris Rock following a joke about Smith’s wife.
April – In the UK, the police have their say as prime minister Boris Johnson and chancellor Rishi Sunak are handed fixed penalty notices in England, and Scottish first minister Nicola Sturgeon is spoken to by Scottish police, all for the breaking of lockdown rules. In France, President Macron secures a second term in office following victory over Marine Le Pen, albeit by a reduced majority. UK inflation leaps 2% from the March reading to 9%, with the US headline hitting 8.6% and 8% in the EU. However, the war in Ukraine rages on and a mixture of inflationary pressure plus a flight to safety in the exchange markets begin to pull some US muscle onto the bones. GBP/USD and EUR/USD continue to slide below 1.2850 and 1.0750 respectively.
May – The Queen misses the state opening of Parliament for the first time in her reign due to mobility problems. The BoE and Federal Reserve (Fed) continue their interest rate tightening stance as the UK base rate and Fed Funds rate are increased by 25 basis points and 50 basis points respectively to both stand at 1%. China also announces a zero tolerance to COVID-19, and with added geopolitical issues in Ukraine, rising global inflation and interest rates, the flight to safety is now in full swing as the USD bulls roar. GBP/USD slides towards 1.20 and EUR/USD slips below 1.04 for the first time since 2016.
June – The Queen is back in the headlines in June as the country celebrates her Platinum Jubilee, enjoying an extra bank holiday with a surprise cameo from Paddington Bear. On the markets, the Fed surprises with a 75 basis point rate rise, while the BoE continues with its 25 basis point hike policy. However, forecasters are now beginning to revise the end of year interest rate levels higher. The Fed leads the way with expectations now seeing US interest rates as high as 3.5%. The US dollar strength theme continues on the exchanges as USD begins to continually test the psychological 1.20 level against GBP.
July – Temperatures soar in July with record breaking temperatures seen across the UK and it isn’t only the weather that was over-heating. In Westminster, Boris Johnson finally sees the writing on the wall and tenders his resignation, beginning a very drawn-out election process to find his successor. Little did we know then that this would very much be the calm before the storm. The Fed continues with its aggressive interest rate tightening programme adding another 75 basis points to the Fed Funds rate. The EU also muscles in on the act for the first time in 2022, raising its headline repo rate to 0.5% from zero. Growth fears begin to creep into the markets in the UK and across the EU and with the war in Ukraine showing no signs of easing, the US dollar begins to make strong headway against the other major currencies. GBP/USD breaches 1.20 for the first time and EUR/USD sails towards 1.02, dangerously close to parity.
In other news, the English women’s football team (the Lionesses) beat Germany 2-1 to become european champions for the first time.
September – And it’s Liz Truss! She beats Rishi Sunak by a much smaller margin than anticipated, but she becomes the UK’s second prime minister of the year, but not the last. Sadly, her first duty is to oversee the UK’s first state funeral in a generation as the Queen sadly passes away on 8 September and is succeeded by her son, now King Charles III. Following her funeral, affairs of the state begin to return to normal and Liz Truss appoints Kwasi Kwarteng as her chancellor. And on 23 September, Kwarteng sets out their ‘plan for growth’ during the mini-budget, which includes £45 billion of tax cuts but, critically, no forecast from the Office for Budget Responsibility of how these cuts would be funded. OH KWASI, WHAT HAVE YOU DONE??!!! To say that this is not received well is a massive understatement. The GBP quite simply crashes to a record low against the USD at 1.0697 and 0.90 against EUR. The BoE is also forced to intervene as pension funds are in danger of collapsing. The BoE has only just raised interest rates by another 50 basis points to 2.25% and markets are already pricing in as much as 200 basis points of expected tightening at its next meeting in early November. Lenders are forced to withdraw their fixed rate lending products as the five year swap price rockets, and the prevailing rate heads towards 7% before the very timely intervention by the BoE. September is a tumultuous month for so many differing reasons, surely things would have to change in October.
October – And change they do. In the UK, inflation hits a high of 11.1% and with house prices becoming unaffordable the chancellor is forced into a U-turn over one of his most controversial policies, a tax cut of 1% for the wealthiest. The damage, however, has already been done and after just 38 days in the job Kwarteng is forced to resign with his position now untenable. His successor, Jeremy Hunt, then sets about reversing just about every measure announced in the previous mini-budget. These steps appear to work and markets settle. GBP/USD climbs back towards 1.13 with EUR/GBP moves lower at 0.87. With her position now undermined, five days later Liz Truss also steps down to become the shortest serving prime minister in history and is soon replaced by Rishi Sunak.
November – The beginning of November sees the UK, US and EU all increase interest rates by 75 basis points to 3%, 4% and 2% respectively, however, it is a shock US Consumer Price index (CPI) figure that really puts the cat amongst the pigeons, coming in 0.2% lower than expected. Shocked, the US dollar is sold as traders see this as a sign that the Fed will ease its aggressive interest rate tightening stance and with inflation now slowing, the peak is in sight. Fuelling this change of heart is a perception of risk off as Ukraine begins to regain territories lost to Russia, and the EU is beginning to overcome its energy supply issues. The result is that GBP/USD moves back above 1.1850 and EUR/USD races above 1.03 from a low of 0.96.
In other news, former health secretary Matt Hancock is a surprise contestant on the reality show ‘I’m a Celebrity … Get Me Out of Here’…Yes, crazy I know, but it did really happen.
December – So, here we are at the end of a year that has seen war in Europe, rising inflation and interest rates, three UK prime ministers, two monarchs, a cost-of-living crisis and one of the worst fiscal decisions ever undertaken in politics. Sterling lost 20% of its value throughout the year, before clawing back 13 to 15% of the shift. The US dollar roared throughout the year and remains the preferred flight to safety venue in the investment world, and the single currency has finally found its mojo after flip-flopping itself throughout the year, driven by energy supply issues and costs. A final round of central bank activity in December sees rates finish the year at 3.5% in the UK, 4.5% in the US and 2.5% in the EU. I don’t think that anyone would have foreseen those interest rate levels a year ago. With everything else that has happened, surely that is it, and a very weary and traumatised 2022 can finally be put to rest…oh hang on! Did somebody mention industrial action in the UK from train drivers, postal workers, border forces, nurses and potentially ambulance drivers?
The war in Ukraine is still raging, although there appear to be fewer battles fought on the ground with the Russians taking more of a long arm, missile approach at the moment. I am no war strategist, so am unable to comment if this is significant. Only time will tell.
The ‘R’ word is likely to be a major factor of 2023. Which economies will go into recession, how long for and how deep it will be, are the major unknowns.
In conclusion, eyes will soon return to the conflict in Ukraine. Any light at the end of the tunnel will be US dollar negative, especially against EUR (more so than GBP) due to the energy implications. There are still question marks over the supply of grain etc, but the world is/should be beginning to live with this issue now. Of course, recession will also be a major influencer. The UK appears to be the one expected to be hardest hit at the moment, but these are fluid times and situations do turn around very quickly.
Finally, they say things generally come in threes, so we have had 2020, 2021 and now 2022 of looking through the cracks between fingers. Surely, 2023 will be the year that gets the world back on track… won’t it?
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Brian is responsible for managing the foreign exchange book across the company’s international jurisdictions. As part of the treasury team, he works closely with our relationship managers to provide foreign exchange solutions for our clients.
Brian joined in December 2018 and has over 35 years’ financial markets experience, working for various global banking operations including Lloyds Bank Plc, Royal Bank of Canada and BNP Paribas.
Brian is a member of the Chartered Institute for Securities & Investment and holds the Investment Management Certificate and ACI Dealing Certificate.
Brian is responsible for managing the foreign exchange book across the company’s international jurisdictions. As part of the treasury team, he works closely with our relationship managers to provide foreign exchange solutions for our clients.
Brian joined in December 2018 and has over 35 years’ financial markets experience, working for various global banking operations including Lloyds Bank Plc, Royal Bank of Canada and BNP Paribas.
Brian is a member of the Chartered Institute for Securities & Investment and holds the Investment Management Certificate and ACI Dealing Certificate.
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